Japan’s government bond market is emerging as a potential source of stress for the rest of the world. Nomura Research Institute said the latest rise in global long-term yields may be originating in Japan rather than being transmitted from abroad, a shift it said could threaten financial balance sheets, pressure technology valuations, and slow AI investment.
According to Wallstreetcn, Japan’s 10-year government bond yield briefly moved above 3.0% in Tokyo trading, the first time that has happened since September 1996. In a recent report, Nomura Research Institute executive economist Takahide Kiuchi said the 10-year Japanese government bond yield has risen by about 1.4 percentage points over the past year. Over the same period, the increase in the U.S. 10-year Treasury yield was only about half as large, which he said suggests the move in Japanese yields has been driven mainly by domestic factors rather than spillovers from overseas markets.
Nomura says Japan may be the source of the global move higher in long-end yields
Kiuchi compared yield levels across major markets and said Japanese government bond yields have reached a 30-year high. By contrast, U.S. Treasury yields have only returned to levels last seen in January 2025, Germany’s 10-year government bond yield is at its highest level since 2011, and the UK 10-year government bond yield is at its highest since 2008. On that basis, he said Japan is more likely to be the source of the global rise in long-end yields than a passive follower.
The report also said the Trump administration has started to intervene in Japanese economic policy in an unusual way, pressing the Bank of Japan to raise rates and pushing the Takaichi government to rein in fiscal expansion.
Three factors behind the move above 3%
Nomura said Japan’s 10-year yield had already approached the 3% threshold in August and finally broke through that round number intraday on Sept. 1. It cited three drivers.
- Expectations for a Federal Reserve rate hike strengthened after comments by Fed Chair Kevin Warsh at the recent Jackson Hole meeting, putting pressure on global bond markets.
- Expectations for a Bank of Japan rate hike also increased, with markets anticipating a policy rate increase at the BOJ’s September policy meeting.
- Fiscal expansion concerns worsened in Japan. As of the end of August, ministries and agencies had submitted requests for the FY2027 general account budget totaling roughly JPY 20 trillion more than the FY2026 budget, heightening concern over Japan’s fiscal position.
Fiscal risk premium was the largest contributor
Nomura broke down the roughly 1.4-percentage-point rise in the 10-year JGB yield over the past year. It estimated that higher inflation expectations accounted for about 0.49 percentage points, changes in the BOJ’s share of JGB holdings accounted for about 0.08 percentage points, the rise in the U.S. 10-year Treasury yield contributed about 0.08 percentage points, and changes in real policy rate expectations accounted for about 0.15 percentage points. The category labeled as other factors contributed as much as 0.60 percentage points.
The report said that category mainly reflects a risk premium tied to worsening fiscal conditions in Japan. On that view, fiscal risk was the largest single factor behind the rise in yields, exceeding the impact from inflation expectations and monetary policy expectations.
Kiuchi said rising long-end rates are not always negative. If they are driven by stronger growth potential or higher inflation expectations, real rates do not necessarily rise in tandem and the drag on the economy may be limited. But if the increase comes mainly from fiscal risk, the effect on economic activity is often more materially negative. He added that this kind of impact tends to appear with a lag and can be harder to detect than the effect of higher short-term rates.
Trump administration pressure on Japan
The report said the Trump administration has recently stepped into Japanese economic policy in a way that is rarely seen. U.S. Treasury Secretary Bessent told Japanese Finance Minister Katsuyuki Katayama and Bank of Japan Governor Kazuo Ueda at a recent G20 meeting of finance ministers and central bank governors that Japan needs to clearly communicate a path for fiscal sustainability and rate hikes.
Before that, after the end of joint U.S.-Japan foreign exchange intervention in late July, Bessent had already publicly expressed hope for a BOJ rate increase. Nomura said the logic behind Washington’s position is that continued yen weakness and falling JGB prices, which means rising yields, could have negative effects on U.S. and global markets. In response, Washington is seeking to shape Japan’s policy direction more actively by pushing for BOJ tightening and a pullback from fiscal expansion under the Takaichi government.
The report added that if the Takaichi government gradually adjusts its pro-fiscal-expansion stance, the risk of fiscal deterioration in Japan would ease and upward pressure on the 10-year JGB yield would also diminish.
Warning for global markets and AI financing
Nomura said the potential effects of a Japan-led rise in global long-end yields should not be underestimated. At the macro level, higher long-term rates would raise interest costs for governments and could trigger a negative spiral of fiscal deterioration followed by still higher yields. They would also lower the market value of bonds held in financial institutions’ portfolios, weakening balance sheet stability. Property and equities, as other risk assets, would also face pressure.
The report singled out technology and AI-related stocks as especially rate-sensitive. Kiuchi said that if the rise in long-end yields centered on Japan continues, the AI boom in equities could cool. A correction in AI-related share prices would then weaken the ability of companies in the sector to raise large sums through equity or debt financing, slowing the expansion of physical investment in AI infrastructure.
「This may not be merely a gradual cooling of global economic activity, but could trigger a sudden economic slowdown,」 the report said. Nomura added that this also helps explain why the Trump administration chose to intervene directly in such an unusual fashion and urge Japan away from policies that could weaken the yen further and push long-end yields even higher.
