How to save Japanese bonds? The finance minister's "verbal intervention" is useless; only the central bank "printing money" works.

Japan's government bond market is undergoing a "collapse" that has shocked global investors. As long-term bond yields hit historic highs, confidence in Japan’s fiscal discipline is rapidly evaporating. Goldman Sachs bluntly states that, faced with a severe imbalance of supply and demand, Japanese policymakers have few options left. Despite the finance minister’s attempts at verbal reassurance, the “logical endgame” points toward the Bank of Japan being forced to step in again.

The severity of this crisis has been confirmed by US Treasury Secretary Yellen, who described the movements in Japanese bonds at Davos as a stunning “six-standard-deviation” swing, already causing “spillover effects” in the US bond market. Although Japanese Finance Minister Satsuki Katayama quickly called for the market to “stay calm,” prompting a brief drop in 40-year yields, analysts generally believe that mere verbal intervention cannot reverse a trend driven by structural imbalances and political uncertainty.

As panic spreads, analysts warn that if the decline deepens, the Bank of Japan may have no choice but to deploy its unlimited bond-buying tool to intervene. However, this “QE rescue” is a double-edged sword—it may suppress yields but will most likely batter the yen, sending it below the critical psychological barrier of 160.

Goldman Sachs’ Assessment: This Is Not Emotional Turmoil, But a “Structural Breakdown”

After tepid results at the 20-year government bond auction, Japanese bonds faced what traders described as “everyone selling, across all maturities, simultaneously.” The 30-year and 40-year yields jumped more than 25 basis points in a single day, and long-term rates briefly broke above 4%.

On the surface, the market blames Prime Minister Sanae Takaichi’s campaign pledge—lowering the food consumption tax without a clear funding source. But Rich Privorotsky, Goldman Sachs Delta-One trading desk head, says this is not simply an external shock or short-term emotional outburst, but rather a concentrated exposure of the Japanese government bond market’s long-standing “lack of natural demand.”

Goldman believes the Japanese bond market is suffering from an extremely fragile, hard-to-reverse, years-long supply-demand imbalance. Previously, this was masked, but now it has been rapidly magnified by fiscal policy headlines.

The core of the current turmoil is not geopolitics, but a stress test of Japan’s fiscal capacity.

Goldman Sachs: Japan Faces a Dilemma, Central Bank Intervention Is the Endgame

Facing pressure as the long end of the yield curve breaks past 4%, Rich Privorotsky notes in a report that Japan faces two tough choices:

1. Sharp spending cuts: Politically, this is almost “toxic.” Especially for Sanae Takaichi, who hopes to win a majority in the election and is trying to unify her platform with tax cuts like suspending the food consumption tax. As Privorotsky asks, “Who wants to pay tax on food?”
2. The Bank of Japan being forced back to YCC (Yield Curve Control): This is a highly risky option, especially for the yen’s exchange rate, but it feels like “the logical endgame.”

Privorotsky notes that if Japan approaches the theoretical limit of its fiscal capacity, one side must concede. The former (spending cuts) appears hard to accept, so the latter (central bank intervention) becomes the most likely path.

Macquarie Bank Singapore strategist Gareth Berry said: “If the sell-off continues, especially if it spreads globally, we should see the Bank of Japan reactivate its unlimited bond-buying tool.”

The Cost to the Currency: The 160 Boundary Is in Danger

However, this intervention comes at a price.

Ryutaro Kimura, Senior Fixed Income Strategist at AXA Investment Managers Ltd, warns: “If the Bank of Japan uses aggressive intervention to suppress rates, the USD/JPY exchange rate may easily break the government's 160 boundary.”

Currently, the yen is hovering near 158, and market worries about currency devaluation from central bank intervention are mounting.

Goldman concludes that in times led by fiscal policy, governments often rely on inflation, while central banks cap nominal rates—resulting in persistently low real rates and structurally weak currencies. This appears to be the script Japan is heading towards.

Why “Verbal Intervention” Can’t Save JGBs: The Market Is Pricing in a “Truss Moment”

This also explains why Finance Minister Satsuki Katayama’s appeals for calm have only briefly soothed volatility—not reversed the trend. The ministry can stress deficit size, debt structure, and medium/long-term plans, but cannot change one reality: the market is no longer willing to buy long-term Japanese bonds unconditionally.

Data shows that Japanese life insurance companies were net sellers of JGBs in December, further intensifying market concerns about the lack of “natural demand.” Aegon Asset Management’s Colin Finlayson said: “There is almost no natural demand for long bonds. In the short term, it is hard to see what could support Japanese government bonds.”

Assessments from multiple institutions echo Goldman’s view:

• Ultra-long JGBs “lack natural demand”;
• Without official intervention, selling pressure is unlikely to subside on its own;
• Some form of policy “circuit-breaker” may be inevitable.

As the February 8 election approaches, market panic is further escalating. Investors fear that Sanae Takaichi’s aggressive fiscal stimulus may trigger a “Truss moment” similar to the UK in 2022.

UBS traders point out that if the Bank of Japan is forced to follow fiscal expansion, it will find itself trapped between bond yields and the currency, no longer just market volatility but a re-pricing of policy credibility.

“This is essentially the market pricing in Japan’s Truss moment,” State Street Investment Management Senior Fixed Income Strategist Masahiko Loo said bluntly.

Risk Warning and DisclaimerThe market has risks. Investment should be cautious. This article does not constitute personal investment advice and does not take into account any individual user’s specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views or conclusions in this article suit their particular situation. Investment is at your own risk.