TOKYO – Bond markets are cracking across the globe as geopolitical, technological and demographic trends simultaneously upend everything investors thought they knew about 2026.
The turmoil is pushing borrowing costs up multi-year maximum from Washington to London to Tokyo. It is changing economic and political calculations in real time. And debt yields, it seems clear, will remain elevated everywhere at once.
“Prices will stay higher for longer and investors should plan accordingly,” warns Apollo Management economist Torsten Slok.
Nowhere is that more true than here in Japan. The global bond sell-off is putting Tokyo in an uncomfortable spot – raising the specter of the dreaded economic refrain, “This time is different,” coming true.
Yields on 30-year Japanese government bonds are at their highest since 1999, when the maturity was first sold. Of course, the $31 trillion U.S. Treasury market is attracting even more attention. On Tuesday, the 30-year US yield jumped a basis point to 5.18%, the highest since 2007, as rising oil prices fueled inflation fears.
In recent years, the 5% level has been seen as a “line in the sand,” notes Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle. Now that it’s over, investors in the primary debt market are moving away from long-term debt.
“With debt rising faster than growth, inflation profiles deteriorating and a lack of political will for fiscal reforms, there is little reason to go long,” says Ajay Rajadhyaksha, global head of research at Barclays Banks.
The UK is also in the spotlight in unenviable ways. Markets are increasingly concerned about London politics and, as a result, fiscal direction. Concerns about future spending plans are clashing with leadership turmoil and fears of a Liz Truss-style repeat the fiscal friend. That has pushed walnut yields to the highest in the Group of Seven as investors seek more compensation for holding UK debt.
“The recent revaluation has pushed the Gilt curve to its highest level since 1998,” economists Fatih Yilmaz and Neil Staines at Eurizon SLJ Capital wrote in a report. “The timing is also unhelpful. Fiscal and political uncertainty are coinciding with the conflict in Iran, while continued pressure on living standards continues to weigh on the economy.”
Yilmaz and Staines warn that “further sustained growth above 7% could trigger a deep recession and a full-blown crisis of fiscal credibility. Such a scenario could combine elements of a severe UK housing slump, the Eurozone sovereign crisis and a much harsher version of the post-Liz Truss market disruptions”.
Robin Brooks, economist at the Brookings Institution, notes that “Japan has been in a slow shock of this kind for two years.” He notes that “the bottom line is that ‘Liz Truss’ bond market sell-offs are becoming more common across the G10 as debt levels rise and institutional integrity declines. The gap between the G10 and emerging markets is becoming cloudywhich is a driver behind the rapid rate of appreciation of EM currencies against the G10.”
However, swings in Japan may matter more in the short term. At the moment, Japanese yields are skyrocketing, while a weak yen is testing the 160 level against the dollar. Rising 10-year JGB yields at 2.77% it’s all the more worrisome given that Japan is managing the world’s largest debt burden with a shrinking population.
The plot thickens when one considers the fourth-largest economy’s role as the world’s largest creditor nation. Twenty-seven years of the Bank of Japan holding rates at or near zero has turned Tokyo into the ATM of global markets.
For decades, investment funds borrow at a low price in yen to bet on the highest yielding assets around the globe. As such, sudden movements of the yen disrupt markets around the world. The so-called “yen trade” is more popular everywhere. And it is prone to sharp correction – now perhaps more than ever.
“The conflict in the Middle East has prompted a revision of our growth and inflation forecasts for Japan,” notes Deborah Tan, an analyst at Moody’s Ratings. Tan adds that “higher inflation and the prospect of additional fiscal support are putting pressure on JGB yields.”
One reason is Prime Minister Sanae Takaichi tempting fate with her fiscal plans. In the months before he became prime minister last October, Takaichi rattled debt markets with talk of tax cuts and increased stimulus spending. This came after her predecessor Shigeru Ishiba warned in May 2025 that Tokyo’s deteriorating finances are “worse than Greece.” Ishiba’s point was that with a debt to GDP of 260% and the fastest shrinking population in the developed world, a tax cut seems unwise.
There are unique reasons why the oft-anticipated JGB crash never seems to arrive. For one thing, 90% of JGBs are held domestically. This significantly reduces the risk of a large-scale capital flight. Meanwhile, banks, insurance companies, pension funds, trusts, the postal system and the growing ranks of retirees would suffer painful losses. So the collective incentive is to hold debt issues rather than sell them.
However, even domestically concentrated debt markets like Japan’s cannot avoid the shock waves flowing through the global financial system. Hence the fear of a “The Liz Truss momentIn Tokyo. In late 2022, then UK Prime Minister Truss destabilized the debt market by trying to avoid an unfunded tax cut by bond traders. Extreme market turmoil remains a cautionary tale for Takaichi as her party mulls fiscal relief.
That risk made headlines again this week. In recent weeks, Takaichi said Japan’s economy did not need an additional budget financed by new borrowing. Now, Takaichi is directing Finance Minister Satsuki Katayama to create a supplementary budget as rising commodity prices hit consumer confidence. This about-face is adding to the strains on the JGB market.
“Any additional budget would come amid renewed concerns over Japan’s fiscal sustainability and would reduce the Takaichi administration’s ability to deliver structural changes, such as lifting constitutional limits on defense spending, that could meaningfully shift the balance of power in Asia,” said Carlos Casanova, economist at Union Bancaire Privee.
However, as an added wrinkle, so-called “bond watchdogs” are watching Tokyo’s every move. It’s complicated, of course. Because there is so little trading in ultra-long JGBs, notes economist Richard Katz, author of the Japan Economy Watch newsletter, “small events can send their rates flying.”
Extra-long JGBs, Katz notes, were created at the behest of life insurers and similar institutional investors so they could match maturities between their assets and liabilities. They practice “buy and hold”, so there is little trading in them, compared to ¥1.0 quadrillion ($6.3 trillion) in trading in the 10-year JGB in 2025.
“Such thin trading means that the yield on 30- and 40-year JGBs can be thrown by a relatively small burst of buying or selling,” notes Katz. “Therefore, it is a mistake to take such spins as a sign of financial fundamentals.”
Japan has also long relied on a dynamic of mutually assured destruction. Because JGBs are still mainstream financial asset held by all, there is little incentive to sell. The dark side is that fear of a bond market shock has caused the BOJ to pull back on its monetary shocks for decades now. Fears of triggering a bond market meltdown have long deterred policymakers from raising rates.
Maybe it’s just a coincidence, but 1999 was also the year Tokyo first introduced the 30-year bond and the year the BOJ first cut rates to zero, a first for a G7 economy. Since then, the BOJ has rarely missed an opportunity to push the envelope to add even more liquidity to the economy. The most extreme example was in 2013, when then-BOJ governor Haruhiko Kuroda overruled the central bank’s holdings.
By 2018, Kuroda’s aggressive accumulation of JGBs and stocks through exchange-traded funds saw the BOJ BALANCE more than Japan’s $4.2 trillion economy. Since taking over the BOJ’s controls in April 2023, Governor Kazuo Ueda has tried to scale back Kuroda’s titanic big purchases. And often struggling – especially now as Japan faces stagflation.
The BOJ is expected to raise rates next month from 0.75% to 1%. With the BOJ inflation forecast 2.8% this yearwell above the 2% target, Ueda has plenty of excuses to tighten up. The BOJ is, of course, surrounded by slowing growth; it expects a rate of roughly 0.5% in 2026.
The BOJ is also beset by an unruly bond market. It is a challenge across Asia, especially among emerging economies.
The region does not tend to do well during episodes of runaway dollar strength. In 1997, its rise made it impossible to maintain Asia’s currency links. First, Thailand was devalued. Indonesia next. Then South Korea. All three sided with the International Monetary Fund and other agencies for giant bailouts total 118 billion US dollars. Although neither asked for help, the unrest pushed Malaysia and the Philippines to the brink.
Since then, emerging markets have been highly sensitive to the specter of Fed rate hikes. Case in point: the 2013 Fed “faint tantrum.” Market concerns over the mere suggestion that the Fed might tighten led Morgan Stanley to release a “fragile five” list that no emerging economy wanted to be on. Original group: Brazil, India, Indonesia, South Africa and Turkey.
Now, a rising dollar is again complicating Asia’s development plans. History’s greatest magnet is luring capital from every corner of the globe, amassing the wealth needed to finance the budget deficits of developing countries, keep bond yields stable, and prop up stock markets.
The Iran war has caused the dollar’s destructive tendencies to burst onto the scene again. Despite the fact that the US national debt is approaching 40 trillion dollarshigh inflation and US President Donald Trump’s tariffs, lavish spending and policy instability, the dollar is rising – against all odds. It’s outperforming gold and Bitcoin, even as Trump’s war on Iran goes sideways. It’s even beating the AI trade.
Economist Carol Kong at the Commonwealth Bank of Australia speaks for many when she says “the dollar is king as long as this conflict lasts. If we’re right about prolonging this conflict, I think oil prices will just keep rising and that will push the dollar higher, at the expense of net energy importers like the Japanese yen and the euro.”
All of this could be a clear and present risk for Asia in 2026. For Asia, commodity prices “rise when they exchange rates are already weak is doubly painful,” said Harvard economist Kenneth Rogoff.
These spots will intensify as bond markets retreat across the globe. Rising yields from the US to the UK to Japan are changing the 2026 economic growth calculus and market stability faster than Asia can keep up.
