US Japan 40-year bond yield rises 12 basis points to 3.365%

US Japan 40-year bond yield rises 12 basis points to 3.365%

Japan's 40-year government bond yield rose by 12 basis points to 3.365% on Monday, July 2, 2025, amidst ongoing trade tensions with the United States [1]. This increase comes as U.S. President Donald Trump announced a 25% tariff on Japanese goods, set to take effect on August 1 [1]. The tariff, while lower than the previously threatened 35%, remains significant and adds pressure on Tokyo to reach a trade deal with Washington.

Prime Minister Shigeru Ishiba has stated that Japan will continue negotiations with the U.S. to secure a mutually beneficial agreement. However, the trade uncertainty has contributed to the rise in bond yields. The Bank of Japan's decision to slow its JGB purchases and the growing skepticism among investors have also played a role in the steepening yield curve [2].

The Japanese government bond (JGB) yield curve has steepened dramatically in 2025, with long-term yields rising to 2.85% for 30-year JGBs from 1.2% in early 2024 [2]. This trend is driven by fiscal policy shifts, central bank normalization, and investor skepticism. The term premium, which is the extra yield investors demand for long-term bonds, has surged, further pressuring prices.

The yen's path remains contentious, with potential strength due to the BoJ's gradual rate hikes and U.S. fiscal imbalances, but risks tied to fiscal credibility and weak JGB demand could undermine confidence [2]. This volatility presents challenges for carry traders, who typically borrow yen (low rates) to invest in higher-yielding assets, but with JGB yields rising, the cost of funding has increased, squeezing returns.

Investors are advised to monitor trade talks between the U.S. and Japan, as a resolution could ease growth fears and stabilize the yen. Additionally, equity exposure to financials and hedging against yen volatility should be prioritized.

References:
[1] https://www.tradingview.com/news/te_news:468466:0-japan-10-year-yield-rises-as-trump-announces-25-tariff/
[2] https://www.ainvest.com/news/jgb-yield-curve-steepening-era-markets-carry-trades-2507/