BOJ's next rate move could reshape government bond valuations and long-term allocation strategies
Japan’s bond market just hit levels last seen decades ago, forcing the Bank of Japan (BOJ) to move – and putting Japanese institutional flows squarely in focus.
According to CNBC, the 10‑year Japanese government bond (JGB) yield recently climbed to 1.917 percent, the strongest level since 2007, while the 20‑year reached 2.936 percent and the 30‑year hit a record 3.436 percent based on LSEG data.
CNBC also noted that Japan scrapped yield curve control in March 2024 and ended the world’s last negative interest rate regime, even as inflation stayed above the BOJ’s 2 percent target for 43 straight months.
This is happening against a heavy fiscal backdrop.
Japan’s debt‑to‑GDP ratio is almost 230 percent, the highest in the world, and that the government is preparing its largest stimulus package since the pandemic.
Magdalene Teo at Julius Baer told CNBC that new debt issuance of 11.7tn yen for Prime Minister Sanae Takaichi’s supplementary budget is 1.7 times larger than that under Shigeru Ishiba in 2024, highlighting the strain of balancing “economic stimulus initiatives” with “fiscal sustainability.”
Policy normalisation is adding political tension.
Reuters said Bank of Japan Governor Kazuo Ueda used “diplomacy” and concerns over inflation and a weak yen to sell a December hike to 0.75 percent to Takaichi, who “only last year called rate hikes ‘stupid’.”
Reuters reported that markets now see a December move as almost a done deal after Ueda said the BOJ would consider the “pros and cons” of a hike this month, while Finance Minister Satsuki Katayama and some of Takaichi’s reflationist aides signalled they would not stand in the way if yen weakness persists.
Bloomberg similarly reported that key members of Takaichi’s government would not try to stop a December rate rise, making a move more likely even though some senior officials oppose the timing.
For global investors, the key question is whether higher Japanese yields and a narrower Japan– US rate gap will trigger another damaging unwind of yen‑funded carry trades.
CNBC recalled that a hawkish BOJ hike and weak US data in August 2024 helped spark a global selloff, with the Nikkei dropping 12.4 percent in its worst day since 1987.
But Masahiko Loo at State Street Investment Management told CNBC that while the narrowing gap reduces the appeal of yen‑funded trades, he does not expect “a repeat of the 2024 systemic unwind,” and instead anticipates “episodic volatility and selective deleveraging.”
Underneath the headlines, Japanese institutions remain active abroad.
Justin Heng at HSBC told CNBC that Japanese investors have shown little sign of repatriating funds and remain net buyers of foreign bonds.
From January to October 2025, they bought 11.7tn yen in overseas debt, far above the 4.2tn yen purchased in all of 2024, driven mainly by trust banks and asset managers benefiting from retail inflows into tax‑exempt investment programs.
Heng said lower hedging costs from further US Federal Reserve cuts will likely encourage even more foreign bond exposure.
