Japan Bonds Tumble as Political Uncertainty Fuels Market Jitters

Japanese government bonds plunged in early trading, with the 10-year benchmark yield spiking to 1.21%—its highest level since late 2023—amid deepening concerns over political instability. The move reflects growing investor unease following unexpected cabinet reshuffles and fragmented legislative support for key economic reforms. As confidence in policy continuity wanes, capital is exiting long-dated JGBs, pushing up borrowing costs for Japan’s heavily indebted public sector. The sell-off extended beyond bonds, pressuring the Japanese yen. The JPYUSD exchange rate weakened sharply, falling to 147.85 by mid-morning—a 1.6% drop in two hours—marking its weakest level in nearly a month. This depreciation amplifies inflation risks and complicates Bank of Japan’s monetary policy outlook, even as policymakers maintain their stance of cautious normalization. Equity markets reacted negatively, with the Nikkei 225 index dropping 1.3% at the open, led by financials and exporters sensitive to currency swings. Investors are now factoring in higher financing costs and reduced fiscal predictability, prompting defensive positioning across regional portfolios. The broader Asia-Pacific fixed-income space has seen similar pressure, with Korean and Taiwanese sovereign yields also rising modestly. Market participants now closely monitor upcoming parliamentary sessions and potential leadership transitions within the ruling coalition. A breakdown in consensus could further destabilize the bond market, while any signal of policy coherence may offer temporary relief. For now, the focus remains on political risk as a dominant force shaping Japan’s financial landscape.