Yields on long-term Japanese government bonds are on the rise, with a significant increase expected by January 2026. This surge is connected to worries about Japan’s financial situation due to new spending plans ahead of the upcoming general election. Japan’s government debt-to-GDP ratio has been decreasing, largely thanks to rising tax revenues. However, refinancing older, low-coupon bonds from a time of very low interest rates at higher rates will likely boost debt servicing costs.

fxstreet insights team observations

The FXStreet Insights Team shares observations from experts and analysts. These insights are for informational purposes only and do not constitute financial advice or recommendations. Readers should be aware of the risks of market investments, as there are no guarantees concerning accuracy or timeliness. This article’s content should not be taken as investment advice from FXStreet or its affiliates. The recent increase in long-term Japanese government bond yields presents a significant opportunity. The 10-year yield has surpassed 1.25%, a level not reached since the Bank of Japan’s aggressive easing policies began over ten years ago. Positioning for further yield increases by shorting JGB futures or buying put options on those futures seems like a wise strategy in the coming weeks. This sharp rise in domestic yields makes the Yen more appealing, reversing some of the capital outflows we saw throughout much of 2025. The USD/JPY currency pair has already fallen below 138, dropping from over 145 just weeks ago. We expect further Yen strength, suggesting that going long on JPY call options or considering short positions in USD/JPY futures would be beneficial.

impact on japanese equities and political uncertainties

Higher borrowing costs are posing challenges for Japanese stocks, as the low-cost financing that had fueled the market’s rally in 2025 begins to fade. The Nikkei 225 index has already fallen more than 5% from its recent highs in response to the bond market sell-off. It’s crucial to hedge long equity portfolios or start new short positions using Nikkei 225 futures to adapt to this new interest rate environment. The Prime Minister’s spending proposals are raising concerns about fiscal discipline, particularly as Japan’s debt-to-GDP ratio remains around 250%, despite slight improvements last year. This political uncertainty before the election is increasing implied volatility across all Japanese assets. We recommend buying straddles or strangles on major indices to effectively trade expected price movements. Create your live VT Markets account and start trading now.

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