Japan’s long-term bond yields jumped by 27 basis points, impacting both the 30-year and 40-year yields. This drop highlights a complete lack of faith in Japanese government bonds (JGBs). The situation worsened after comments from Japan’s Growth Strategy Minister, Minoru Kiuchi, who minimized the connection between fiscal policy and JGB movements.

Dependence on Foreign Buyers

Data from the Japan Securities Dealers Association revealed that relying too much on foreign buyers in the JGB market is risky. In 2025, foreign investors bought JPY 13.4 trillion in JGBs over 10 years, marking the highest level since 2005. Trust banks bought JPY 4.7 trillion. Large foreign sell-offs during the day could further shake market confidence. The sell-offs were prompted by Prime Minister Takaichi’s acknowledgment of a food sales tax cut for up to two years, raising concerns over financing and leading to more JGB issuance. This suggests that senior government officials may not be concerned about market disturbances, potentially causing more selling pressure. Now, the Bank of Japan (BoJ) is under pressure to be the buyer of last resort. Although the BoJ has been slowing down its JGB purchases, it may need to buy more. The yen’s decline, especially against currencies other than the dollar, might continue amid the turmoil in the JGB market. The sharp 27 basis point increase in long-term JGB yields clearly signals dwindling confidence in Japan’s fiscal policy. The government’s proposed sales tax cut, expected to be funded by new debt, is a key factor behind this market decline. Derivative traders may consider shortening JGB futures or buying put options to take advantage of anticipated price drops in Japanese government bonds.

Yen Weakness and Market Effects

Japan’s heavy reliance on foreign investment, illustrated by the record JPY 13.4 trillion purchase of long-term JGBs in 2025, has turned into a vulnerability. As these investors exit their positions, volatility is increasing, and this trend is likely to continue in the coming weeks. This volatile environment is perfect for long volatility strategies, such as buying straddles on JPY currency pairs to benefit from significant price fluctuations. The current turmoil is further weakening the yen, a trend that has been ongoing. With the USD/JPY recently topping 155, a significant psychological barrier, the outlook for the yen appears negative. Positioning for further declines through options on currency pairs like EUR/JPY and GBP/JPY could be a smart tactic. Attention is now focused on the Bank of Japan, which is in a tough spot. It needs to stabilize the bond market while also presenting a strong message to support the yen. This creates considerable event risk ahead of their upcoming policy meetings, as any unexpected decisions could trigger a sharp market shift. Traders might want to use derivatives to protect their positions or speculate on policy changes, such as buying short-dated JPY call options before the next BoJ announcement. The fallout from the JGB sell-off is already noticeable, pushing global bond yields higher, reminiscent of the UK’s fiscal crisis in 2022. The U.S. 10-year Treasury yield has risen back toward 4.3% in recent trading, indicating that this issue extends beyond Japan. This suggests that short positions on U.S. Treasury and German Bund futures may work well, as instability in a key market like Japan’s can lead to a broader reassessment of government debt worldwide. Create your live VT Markets account and start trading now.

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