Epic crash in Japanese bonds, Wall Street: Is the Bank of Japan going to "step in for emergency rescue"?

Japanese government bonds are experiencing an epic sell-off, with long-term bond yields soaring to record levels. This is mainly due to market investors panicking over Prime Minister Sanae Takaichi’s aggressive fiscal expansion plans and the resulting inflation risks.

On the 20th, the yield on Japan’s 30-year bonds rose 26.5 basis points to 3.875%; the yield on 40-year bonds rose 27 basis points to 4.215%, hitting another all-time high. The trigger for this sell-off was the government's pledge to cut the food consumption tax to win the election, without specifying the funding source, sharply intensifying market concerns about Japan’s fiscal discipline and government spending.

This bond market crash has started to spill over to the stock and foreign exchange markets, placing huge pressure on the Bank of Japan. Analysts point out that, to curb out-of-control yields, the BOJ may be forced to accelerate interest rate hikes, or even immediately launch emergency bond purchase operations to calm the market.

Strategists warn that the current market turmoil resembles Britain’s “Truss shock,” and if the authorities don’t quickly send a clear signal on interest rates or intervene, volatility may further worsen and even spread to global bond markets.

Return of the “Truss Moment”?

The core of this round of market turmoil lies in fear of “fiscally unsupported stimulus.” Rinto Maruyama, a currency and rate strategist at SMBC Nikko Securities Inc., noted that Sanae Takaichi was extremely aggressive at the press conference, proposing a consumption tax cut plan without a clear source of funding. He called this a “major shock,” saying the market currently has no visibility on how the government’s plan would finance the proposed tax cuts. Although Japan’s credit default swaps (CDS) haven’t surged like during the UK’s “Truss shock,” interest rates are still soaring due to the lack of a clear funding source.

Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management Co., said the bond market was “confused and surprised” by the announcement, resulting in runaway rate increases. Shinji Kunibe, global fixed income portfolio manager at Sumitomo Mitsui DS Asset Management Co., described the market panic:

“After what seemed like a routine 20-year government bond auction quickly turned into a crash, everyone was glued to their screens. It looks like a market warning against fiscal expansion.”

Wall Street Calls for BOJ “Emergency Rescue”

In the face of continued selling, Wall Street analysts believe Bank of Japan intervention is imminent. Gareth Berry, strategist at Macquarie Bank in Singapore, said that if the sell-off intensifies, the BOJ may intervene and buy Japanese government bonds. He noted that although Governor Kazuo Ueda has been reluctant to use this tool, he may soon have no choice. “If the sell-off continues, especially if it spreads globally, we should see the BOJ reactivate this tool, possibly as soon as tomorrow morning’s routine operations.”

Tadashi Matsukawa, head of bond investment at PineBridge Investments Japan Co., also believes that as yields rise so sharply, calls for emergency action by the BOJ and buybacks by the Finance Ministry may intensify. He pointed out that although the issuance of super-long bonds decreased last year, supply-demand conditions have not improved.

Challenges Facing Monetary Policy Normalization

The market broadly believes that in the current fiscal situation, the BOJ’s monetary policy is too loose. Simon Ballard, chief economist at First Abu Dhabi Bank, noted that the market is punishing the current policy mix, forcing investors into stocks. He believes that compared to nominal growth and fiscal deficits, BOJ policy is “far too loose.” Ballard emphasized that with 3% inflation, 5% wage growth, Sanae Takaichi’s supplementary budget and expectations for extra deficits in 2026, the market’s current pricing (two rate hikes) is far from enough — in fact, four hikes are needed.

Prashant Newnaha, senior Asia-Pacific rate strategist at TD Securities, said successive Japanese governments have underestimated the risks of higher rates and weaker yen from expansionary policies. The market is now adjusting pricing via a higher neutral rate and term premium, which explains the lack of buyers in the JGB market. He warned that expansionary fiscal policy means higher yields are here to stay, and the yield on 40-year Japanese bonds may push above 4% in the coming months.

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