Japan's 30-Year Government Bond Yield Hits Record High

Japan’s 30-year government bond yield reached a record high of nearly 3.5% on January 7, 2026, amid growing concerns over fiscal policy and inflation. The 10-year Japanese government bond (JGB) yield also climbed to 2.12%, its highest level since 1999. The surge in yields reflects shifting market sentiment and expectations of higher borrowing costs for the government.

The move follows a record ¥122.3 trillion ($780 billion) budget approved by Prime Minister Sanae Takaichi’s administration, which includes a significant increase in defense spending. The fiscal expansion, combined with global inflationary pressures, has intensified worries over Japan’s debt sustainability. Analysts note that market participants are factoring in reflationary policy intentions from the Takaichi administration.

The Bank of Japan (BoJ) faces mounting pressure to respond to inflation, but its actions have been seen as lagging behind global central bank trends. The yen’s continued weakness against the dollar has also raised concerns that the BoJ is not adequately addressing inflation risks. Some experts suggest that the BoJ may need to accelerate its normalization process to align with global monetary policy.

Why Did This Happen?

The rise in long-term bond yields is linked to both domestic and international factors. At home, the government’s aggressive spending plans have increased expectations of higher fiscal deficits. The approved budget includes record defense spending, which adds to existing economic strains. On the global stage, investors are pricing in higher defense budgets under the Trump administration and broader geopolitical tensions, which have spurred a sell-off in long-dated U.S. Treasuries.

The yield curve has steepened as a result, with long-term yields rising more sharply than shorter-dated counterparts. This suggests that investors are increasingly anticipating inflation and higher interest rates in the coming years. Analysts at Mizuho Securities note that the market is reacting to the perception of a policy shift rather than actual data points.

How Did Markets Respond?

Corporate bond issuance in Japan is expected to remain robust in 2026, as companies continue to seek funding for capital expansion and M&A activity. The record corporate bond sales in 2025 set a strong foundation for this trend, with investors showing appetite for yen-denominated debt despite rising yields. The increase in borrowing costs has not yet deterred companies from issuing new bonds.

The Ministry of Finance has also indicated plans to reduce the issuance of super-long bonds starting in April, which could temper upward pressure on yields. However, market watchers remain cautious, given the broader fiscal uncertainties. A 10-year JGB auction on January 8 will be closely watched for investor demand signals.

In the equity market, Japanese defense contractors such as Kawasaki Heavy Industries and Mitsubishi Heavy Industries saw sharp declines in share prices following the announcement of new U.S.-China tensions and potential retaliatory measures. Investors are adjusting their portfolios to account for potential geopolitical shocks and trade disruptions.

What Are Analysts Watching Next?

Japan’s bond market is undergoing one of the most dramatic repricing events in modern history. Both the 10-year and 30-year yields have risen by over 100 basis points in a matter of months, signaling a shift in risk perception and inflation expectations. Analysts are now monitoring whether the BoJ will intervene to stabilize yields or allow the market to adjust naturally.

Investor sentiment is also being influenced by the potential for geopolitical spillovers. China’s recent export controls on dual-use items and rare earth materials have raised concerns about supply chain vulnerabilities. Japan’s reliance on Chinese rare earths and its response to these measures could have broader economic implications. Analysts believe Japan may seek closer coordination with the U.S. to counteract these pressures.

The yen carry trade, a long-standing feature of Japanese markets, is also being reevaluated as bond yields rise. The carry trade typically involves borrowing in yen and investing in higher-yielding foreign assets. However, as JGB yields increase, the attractiveness of the trade is shifting, potentially altering liquidity conditions and investor behavior.

In the coming weeks, investors will closely follow the outcome of the 10-year JGB auction and any policy statements from the BoJ. The BoJ’s stance on inflation, combined with the government’s fiscal path, will determine the trajectory of bond yields and investor confidence in Japan’s financial system.