The 40-year government bond rate in Japan broke 4% for the first time in history, causing a major collapse in the Japanese bond market that spread globally. From Tokyo to Wall Street, markets are engulfed in panic selling.

On Tuesday, the Japanese sovereign bond market experienced a historically unprecedented massive sell-off, with long-term government bond yields soaring to record-high levels. The 40-year Japanese government bond yield surged past the unprecedented 4% mark on Tuesday, reaching the highest level since its issuance in 2007, setting new historical highs in recent days. The fallout from this round of Japanese government bond market collapse has spread to global financial markets, with some Wall Street senior analysts even worried that the wave of Japanese bond sales could lead to a collapse in global stock and bond markets, similar to the "Black Monday" global stock and bond super collapse in August 2024, and are now calling for the immediate initiation of emergency bond buying operations by the Bank of Japan to appease the market. The trigger for this super-sell-off in the Japanese government bond market was the promise by the Komi administration to cut the food consumption tax in order to win the lower house election, but without specifying the source of funds, causing financial market concerns about Japan's fiscal discipline and government expenditure expectations to sharply rise. On Tuesday, in a globally watched and crucial Japanese government bond auction, the demand for 20-year government bonds was weak, leading to a rapid increase in yields for Japanese 10-year, 20-year, 30-year, and 40-year government bonds, with the Japanese 30-year government bond yield reaching a historical high of 3.875% at one point, and the 40-year government bond yield reaching a historical high of 4.215%. Expectations of a rate hike by the Bank of Japan have been rising since 2025, coupled with the remarkably huge stimulus plan of the Komi administration in the order of tens of trillions of yen, leading to the fearsome "term premium" from the United States floating across the ocean to Japan. This has swept through the Japanese stock, bond, and foreign exchange markets, causing long-term Japanese bond yields to collectively surge since the beginning of this year, while the yen exchange rate continues to devalue. The overflow effect of the spike in long-term Japanese government bond yields is spreading to global stock and bond markets. The yield on 10-year U.S. Treasury bonds, known as the "anchor of global asset pricing," has risen to near 4.3%; U.S. stock index futures responded by declining, with Dow Jones futures falling by 1.56%, S&P 500 index futures falling by 1.70%, Nasdaq 100 index futures falling by 2.00%, and European stock index futures indicating a continuation of a downward trend, following the worst single-day performance since mid-November last year in European stock markets on Monday. The continued pressure from rate hikes, coupled with the extremely stimulating fiscal policy of the Komi administration, has caused the "term premium" to push long-term Japanese government bond yields to potentially continue to reach new historical highs until the Bank of Japan sends a signal to pause rate hikes. It is well known that Japan has a huge amount of overseas assets, so if the long-term Japanese government bond yields skyrocket in the short term, this could trigger Japanese overseas investment institutions to sell off assets such as U.S. stocks, U.S. Treasury bonds, and European bonds to offset the massive losses caused by the plummeting of Japanese bonds, or it could trigger a massive outflow of overseas funds from profitable overseas assets back to Japan to embrace high-yield yen assets, which could lead to a global stock, bond, and currency collapse similar to the "Black Monday" global crash in August 2024, a warning that investors should pay attention to. The trillion-yen level tax reduction by the Komi administration, fewer investors dare to catch the "flying knives" of Japanese government bonds As the Japanese election approaches, there is a growing concern about the weakening fiscal discipline in Japan, which spreads rapidly through the Japanese government bond market and global stock and bond markets. Faced with the prospect of a massive tax cut by the Komi administration, global investors are showing extreme caution. Japanese Prime Minister Komi Sonaie announced at a press conference on January 19 that the lower house of parliament would be dissolved on January 23, with lower house elections to be held on February 8. Komi Sonaie stated that she would begin preparations to abolish the two-year food consumption tax and emphasized that the issue of funding for the tax reduction is still under consideration. As the results of the government bond auction were weak that day, exacerbating concerns about the Komi revitalization plan tax cuts, market sentiment plunged rapidly, leading to a vicious cycle of selling pressure. The auction of the 20-year bond, which initially seemed like a routine procedure, quickly turned into a collapse, with everyone watching the screen intently," said Shinji Kunibe, Chief Investment Portfolio Manager of the Global Fixed Income Group at Mitsui Sumitomo DS Asset Management. In Japan, some economists believe that if the policy of cutting the food tax proposed by Komi Sonaie's government is successfully implemented, it is expected to generate about 5 trillion yen in tax cuts per year. The core concern that unsettles the market is that the Japanese government has not disclosed the specific funding source to cover this massive fiscal gap. In response to this, combined with the expectations of a rate hike by the Bank of Japan and the weak demand for the 20-year Japanese government bond auction, the Japanese government bond market is facing increasingly serious selling pressure, with "flying knives" of long-term Japanese government bonds that no investors dare to catch continuing to fall to the ground. What the market is most concerned about is not the "Komi Sonaie government's tax reduction policy itself," but a more critical issue - the 5 trillion yen shortfall in the food consumption tax reduction and where the funds will come from. In the absence of a clear financing plan (increasing taxes, cutting expenses, or other verifiable arrangements), investors are beginning to reassess the tail scenarios of Japan's fiscal discipline and sovereign risk, with the "term premium" in the Japanese government bond market rising significantly. The more challenging part is that fiscal doubts are arising in an environment where there is no "backing off of rate hike expectations by the Bank of Japan." Therefore, with the fiscal commitment of "no funding support," investors are unwilling to bear duration risk, leading to disappearing bids that force yields to seek new marginal buyers at higher levels. The general view from Wall Street institutions is that long-term Japanese government bonds may experience dramatic volatility around two main themes in the future - whether the tax reduction on food consumption will be formally incorporated into election promises, and whether the Japanese government will provide an executable and quantifiable financing path. Wall Street's warning about the sharp drop in long-term Japanese government bonds highlights the enormous policy challenges With a historically rare "super collapse" in Japanese sovereign bonds, the 40-year Japanese government bond yield broke through 4% for the first time, leading some senior analysts on Wall Street to suggest that this could prompt the Bank of Japan to act more quickly and even possibly initiate emergency bond purchases to calm the market. The policy of the government in Japan proposing to trim the consumption tax in the election has drawn attention to people's general concerns about fiscal expenditures and inflation rates, and has made people more aware of the risks facing the Japanese market as it gradually exits years of ultra-loose monetary policy. Market observers predict that the further expansion of fiscal deficits and inflation rates will further complicate the economic situation in Japan. Some strategists predict that if the collapse in the long-term Japanese government bond market intensifies, the Bank of Japan may intervene and purchase Japanese government bond assets. They state that the government proposing to reduce the consumption tax in the election manifesto reflects broader financial market concerns about fiscal expenditures and inflation, and exacerbates risks facing the Japanese market as it gradually exits years of extremely loose monetary policy. This kind of selling pressure is likely to spill over into global stock and bond markets. Below are some initial comments from senior financial market observers: Prashant Newnaha, Senior Rate Strategist for the Asia-Pacific region at TD Securities in Singapore: "Historically, previous Japanese governments have underestimated the risks of increasing rates and yen depreciation from expansionary policies. The market is pricing this risk through higher neutral rates and term premiums, so there are very few buyers for Japanese government bonds in the short term." "But make no mistake, markets are focused on reflationary policies. With Trump seen as 'reflating' the market before the midterms, and the possibility of the Komi administration controlling the lower house, expansionary fiscal policies mean there is still room for yields to rise. Thats why 40-year Japanese government bonds may continue to push above 4% in the coming months." Simon Ballard, Chief Economist at First Abu Dhabi Bank: "Markets are continuing to penalize this policy mix - especially evident in forex and long-term bond markets - which indeed forces investors to shift to value or defensive equity assets. The market's view remains that monetary policies of the Bank of Japan are too accommodative relative to nominal growth and fiscal deficits." "There are ongoing challenges and institutional inertia in the normalization of Japanese government bonds (we need to see four rate hikes, while currently the market only factors in two). Inflation at 3%, wage growth at 5%, and the supplemental budget of the Komi administration with further expected fiscal deficits for 2026 make the situation more complex." Rinto Maruyama, FX and Rate Strategist at SMBC Nikko Securities: "Komi was very defiant in her news conference yesterday. The market previously thought she would consider market concerns. The supplemental budget is not large and is seen as a signal of restraint." "Market participants now generally expect her to push through her favored policies after the election. Unlike the rise in CDS during the 'Tras shock' in the UK, Japanese CDS has not risen significantly. There are not highly leveraged participants who will be forced to cut positions." "Nevertheless, with spending plans lacking clear funding sources, yields are rising rapidly. This is a major shock - one that could be worthy of its separate description. Market sentiment is unlikely to improve unless election promises become clearer. The market cannot see how the government will provide funding for the proposed food consumption tax cut." Shinji Kunibe, Chief Investment Portfolio Manager of the Global Fixed Income Group at Mitsui Sumitomo DS Asset Management: "Everyone is watching the screen because what initially looked like a routine 20-year bond auction quickly devolved into a collapse," he said. "This seems like a warning from the market about fiscal expansion, and the lack of any positive comments from the government side is unsettling. It's hard to say if we can hold on until the weekend without further dramatic volatility." Katsutoshi Inadome, Senior Strategist at Mitsui Sumitomo Trust Asset Management: "The bond market is confused and surprised by Komi's pledge to reduce the consumption tax without specifying the funding source, leading to an uncontrolled rise in long-term yields." Kazuhiro Sasaki, Research Director at Phillip Securities Japan Ltd.: "The sharp rise in Japanese government bond yields is also becoming a negative factor for global stock markets. Of course, government spending may benefit the economy, but if the fiscal burden rises, it becomes a problem." "In addition, as the yen continues to weaken, concerns about the Bank of Japan being forced to hike rates earlier than expected are increasing. These tensions will begin to suppress global stock and bond markets." Mansoor Mohi-Uddin, Chief Macroeconomic Strategist at Singapore Bank: "This is the 'Komi trade' at work. Rising Japanese government bond yields, combined with concerns about U.S.-Europe tariffs making a comeback, could further push up global sovereign bond yields." "The looming election for a new prime minister, the significant increase in the governments high debt already appears significant, but has not caused such a drastic yield fluctuation." Tadashi Matsukawa, Head of Bond Investment at PineBridge Investments Japan Co.: "With the deepening concerns about the deterioration of the fiscal situation due to parties proposing to cut the consumption tax, supply and demand conditions have not improved despite last year's reduction in ultra-long-term bond issuances." "After interest rates have risen to this extent, calls for emergency operations by the Bank of Japan and repurchases by the Ministry of Finance are likely to intensify." Carlos Casanova, Senior Asian Economist at Union Bancaire Privee in Hong Kong: "If the Komi government gains more seats and implements significantly more expansionary fiscal policies, the potential impacts include a weaker yen and rising import inflation, which could disrupt the policy normalization process but ultimately lead to higher terminal rates. The ultimate impact on stocks may be positive. Large exporters may benefit from increased profits in yen terms due to tax cuts and currency depreciation, and higher deposit rates may also support domestic consumption." Gareth Berry, Strategist at Macquarie Bank in Singapore: "If the sell-off deepens further, the Bank of Japan may intervene and buy Japanese government bonds. Bank of Japan Governor Takehiko Kuroda has been very reluctant to use this tool invented during the Haruhiko Kuroda era, but he may soon have no choice. If the sell-off continues, especially if it spreads globally, we may see the Bank of Japan reintroducing and deploying it - possibly as early as tomorrow morning's regular policy operation." Homin Lee, Senior Macroeconomic Strategist at Lombard Odier Singapore: "The main trigger for the turmoil is likely the ongoing escalation of tensions between the two sides of the Atlantic, but the strong fiscal signal from the Komi government will certainly amplify market tension." "Until there is a clear signal from the authorities about a rate hike or defending the exchange rate, market participants may drive momentum trading: a 'double short' on Japanese government bonds and the yen simultaneously. However, we suspect that concerns about sudden reversals in this trade may increase as the political dimension of the bearish market narrative comes into focus." Gerald Gan, CIO at Reed Capital Partners in Singapore: "I believe the recent trend is primarily driven by forced selling, as can be seen from the evolution of technical price momentum. Nevertheless, as demand weakens due to the shift in sentiment, particularly concerning the poor fiscal discipline of the government, long-term Japanese government bond yields are likely to remain at historical highs." "If Prime Minister Komi Sonaie gains strong authorizations from voters in the upcoming sudden elections, the only sustainable way to control long-term government bond yields will be to propose a credible and strong economic growth narrative. I expect this potential new growth narrative to extend throughout 2026 and gain more recognition. Therefore, the current yield levels appear relatively attractive from an investment perspective."