Japan’s Super-Long Bond Yields Hit Record Highs Amid Fears Over Weak Demand and BOJ Policy Shift

Yields on Japan’s super-long government bonds surged to historic highs on Tuesday, fueled by investor concerns over weak demand following a disappointing 20-year bond auction. The 20-year bond yield spiked to 2.555%, the highest level since 2000, while the 30-year and 40-year yields climbed to record highs of 3.14% and 3.6%, respectively. The auction’s results intensified market anxiety about the diminishing appetite for long-duration debt, particularly as the Bank of Japan (BOJ) pulls back from its decade-long ultra-loose monetary policies.

Analysts pointed to broader structural issues affecting investor demand for long-term bonds. JPMorgan warned of a “collapse” in super-long bond prices without intervention, highlighting the influence of rising U.S. Treasury yields and recent fiscal uncertainties in Japan. Political pressures, such as calls for tax cuts ahead of July’s upper house election and growing concern over Japan’s fiscal health, have also added to investor unease. Prime Minister Shigeru Ishiba’s remarks comparing Japan’s fiscal situation to Greece’s crisis-era troubles further spooked markets.

Under Governor Kazuo Ueda, the BOJ has been unwinding its aggressive bond-buying program. However, calls are growing for the central bank to step back in and stabilize the super-long end of the market. A sharp drop in bond market liquidity and functioning—measured at its weakest level in two years—has prompted some participants to call for halting the tapering or increasing bond purchases. Market experts, like Mizuho’s Shoki Omori, warned that dealers’ reluctance to hold inventory could trigger a broader sell-off, spilling into shorter maturities.

The ripple effects of the super-long yield surge were already evident in other parts of the market. The 10-year yield reached 1.525%, its highest since late March, while yields on shorter-dated bonds also edged up. Futures prices for benchmark 10-year JGBs dropped, reflecting widespread nervousness. These moves came as memories of recent global trade tensions linger, with investors reacting cautiously to the possibility of renewed U.S. tariff pressures and their implications for Japan’s export-driven economy.

The BOJ now faces a challenging policy dilemma. While it is eager to continue raising interest rates, it must tread carefully to avoid destabilizing the bond market. Deputy Governor Shinichi Uchida signaled that further tightening depends on economic resilience, especially in the face of external shocks like U.S. tariffs. Market participants remain split on the likelihood of another rate hike this year, as they grapple with the shifting equilibrium in Japan’s interest rate environment and the uncertain path ahead for monetary policy.

Source: Reuters