TOKYO — Bond markets are cracking around the globe as geopolitical, technological and demographic trends simultaneously upend everything investors thought they knew about 2026.
The turmoil is propelling borrowing costs to multi-year highs from Washington to London to Tokyo. It’s altering the economic and political calculus in real time. And debt yields, it seems clear, will remain elevated everywhere all at once.
“Rates will stay higher for longer and investors should plan accordingly,” warns Apollo Management economist Torsten Slok.
Nowhere is that truer than here in Japan. The global bond sell‑off is putting Tokyo in an uncomfortable spotlight – raising the specter of a dreaded economic refrain, “This time is different,” becoming reality.
Yields on 30-year Japanese government bonds are the highest since 1999, when the maturity was first sold. The $31 trillion US Treasury market, of course, is garnering even more attention. On Tuesday, the 30-year US yield jumped basis points to 5.18%, the highest since 2007, as surging oil prices fanned inflation fears.
In recent years, the 5% level has been seen as a “line in the sand,” notes Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle. Now that it’s above that, investors in the premier debt market are pivoting away from longer-term debt.
“With debt rising faster than growth, worsening inflation profiles and no political will for fiscal reform, there is little reason to reach for the long end,” says Ajay Rajadhyaksha, Barclays Banks’s global chairman of research.
The UK is also in the spotlight in unenviable ways. Markets are increasingly worried about London’s political and, by extension, fiscal direction. Concerns about future spending plans are colliding with leadership turmoil and fears of a repeat of the Liz Truss-style fiscal shock. That’s pushed gilt yields to the highest in the Group of Seven, as investors demand more compensation for holding UK debt.
“The recent repricing has pushed the Gilt curve to its highest level since 1998,” write economists Fatih Yilmaz and Neil Staines at Eurizon SLJ Capital in a report. “The timing is also unhelpful. Fiscal and political uncertainty are coinciding with the Iran conflict, while ongoing pressure on living standards continues to weigh on the economy.”
Yilmaz and Staines warn that a “further sustained increase above 7% could trigger a deep recession and a full-blown fiscal credibility crisis. Such a scenario might combine elements of a severe UK housing downturn, the Eurozone sovereign crisis and a much harsher version of the post-Liz Truss market disruptions.”
Robin Brooks, economist at the Brookings Institution, notes that “Japan has been in a slow-motion blow-up of exactly this kind for two years.” He notes that “the bottom line is that ‘Liz Truss’ bond market selloffs are becoming more common across the G10 as debt levels rise and institutional integrity declines. The distinction between the G10 and emerging markets is becoming blurred, which is one driver behind the rapid pace of appreciation of EM currencies against the G10.”
Yet tremors in Japan could matter more in the short run. At the moment, Japanese yields are skyrocketing while a weak yen is testing the 160 level to the dollar. The surge in 10-year JGB yields to 2.77% is all the more troubling considering Japan is managing the globe’s biggest debt burden with a shrinking population.
The plot thickens when the fourth-biggest economy’s role as the world’s top creditor nation is factored in. Twenty-seven years of the Bank of Japan holding rates at, or near, zero turned Tokyo into global markets’ ATM.
For decades, investment funds borrowed cheaply in yen to bet on higher-yielding assets around the globe. As such, sudden yen moves disrupt markets worldwide. The so-called “yen-carry trade” is one most crowded anywhere. And it’s prone to sharp correction — now perhaps more than ever.
“The Middle East conflict has prompted a revision of our growth and inflation forecasts for Japan,” notes Deborah Tan, an analyst at Moody’s Ratings. Tan adds that “higher inflation and prospects of additional fiscal support are putting pressure on JGB yields.”
One reason is Prime Minister Sanae Takaichi tempting fate with her fiscal plans. In the months before she rose to the premiership last October, Takaichi rattled debt markets with talk of tax cuts and increased stimulus spending. This was after her predecessor Shigeru Ishiba in May 2025 warned Tokyo’s deteriorating finances are “worse than Greece.” Ishiba’s point was that with a debt-to-GDP of 260% and the fastest-shrinking population in the developed world, a tax cut seems reckless.
There are unique reasons why the often-predicted JGB crash never seems to arrive. For one thing, 90% of JGBs are held domestically. That significantly reduces the risk of a large-scale capital flight. Meanwhile, banks, insurance companies, pension funds, endowments, the postal system and the growing ranks of retirees would suffer painful losses. So, the collective incentive is to hold onto debt issues rather than selling.
Yet even inwardly focused debt markets like Japan’s can’t avoid the shockwaves coursing through the global financial system. Hence fears of a “Liz Truss moment” in Tokyo. In late 2022, then-UK Prime Minister Truss destabilized the debt market by attempting to sneak an unfunded tax cut past bond traders. The extreme market turmoil remains a cautionary tale for Takaichi as her party mulls fiscal loosening.
This risk burst back into the headlines this week. In recent weeks, Takaichi held that Japan’s economy didn’t need an extra budget financed with fresh borrowing. Now, Takaichi is directing Finance Minister Satsuki Katayama to race an extra budget into existence as rising commodity prices slam consumer confidence. This about-face is adding to strains on the JGB market.
“Any extra budget would come amid renewed concerns over Japan’s fiscal sustainability and would reduce the Takaichi’s administration’s ability to deliver structural changes, such as lifting constitutional limits on defense spending, that could meaningfully alter the balance of power in Asia,” says Carlos Casanova, economist at Union Bancaire Privee.
As added wrinkle, though, is that the so-called “bond vigilantes” are watching Tokyo’s every move. It’s complicated, of course. Because there is so little trading in ultralong JGBs, notes economist Richard Katz, author of the Japan Economy Watch newsletter, “tiny events can send their rates reeling.”
Ultralong JGBs, Katz observes, were created at the behest of life insurers and similar institutional investors so they could match maturities between their assets and liabilities. They practice “buy and hold,” so there’s little trading in them, as opposed to the ¥1.0 quadrillion ($6.3 trillion) in trades in the 10-year JGB in 2025.
“Such thin trading means the yield on 30- and 40-year JGBs can be tossed around by a relatively small burst of buying or selling,” Katz notes. “Hence, it is a mistake to take such gyrations as a sign of financial fundamentals.”
Japan also has long relied on a mutually-assured destruction dynamic. Because JGBs are still the main financial asset held by, well, everyone, there are few incentives to sell. The dark side is that fears of roiling the bond market have had the BOJ pulling its monetary punches for decades now. Fears of triggering a bond market meltdown have long dissuaded policymakers from hiking rates.
Perhaps it’s just a coincidence but 1999 was both the year when Tokyo first introduced the 30-year bond and the year when the BOJ first cut rates to zero, a first for a G7 economy. Since then, the BOJ has rarely missed a chance to push the envelope to add even more liquidity to the economy. The most extreme example was in 2013, when then-BOJ Governor Haruhiko Kuroda supersized the central bank’s holdings.
By 2018, Kuroda’s aggressive hoarding of JGBs and stocks via exchange-traded funds saw the BOJ’s balance sheet top the size of Japan’s $4.2 trillion economy. Since taking the BOJ controls in April 2023, Governor Kazuo Ueda has been trying to taper Kuroda’s titanically large purchases. And often struggling – especially now as Japan grapples with stagflation.
The Ueda BOJ is expected to hike rates next month from 0.75% to 1%. With the BOJ forecasting inflation to 2.8% this year, well above the 2% target, Ueda has ample justification to tighten. The BOJ is, of course, hemmed in by slowing growth; it expects a roughly 0.5.% rate in 2026.
The BOJ is also hemmed in by an unruly bond market. It’s an Asia-wide challenge, particularly among emerging economies.
The region doesn’t tend to fare well during episodes of runaway dollar strength. In 1997, its surge made it impossible to maintain Asia’s currency pegs. First, Thailand devalued. Next Indonesia. Then South Korea. All three went hat-in-hand to the International Monetary Fund and other agencies for giant bailouts totaling US$118 billion. Though neither sought bailouts, the turmoil pushed Malaysia and the Philippines to the brink.
Since then, the emerging markets have been very sensitive to the specter of the Fed hiking rates. Case in point: the 2013 Fed “taper tantrum.” Market jitters over mere hints that the Fed might be hitting the brakes prompted Morgan Stanley to publish a “fragile five” list on which no emerging economy wanted to be. The original group: Brazil, India, Indonesia, South Africa, and Turkey.
Now, a surging dollar is complicating Asia’s development plans anew. History’s greatest magnet is luring capital from every corner of the globe, hogging wealth needed to finance developing nations’ budget deficits, keep bond yields stable and support equity markets.
The Iran war has the dollar’s wrecking-ball tendencies bursting back onto the scene. Despite the US national debt nearing US$40 trillion, high inflation, and US President Donald Trump’s tariffs, profligate spending and policy volatility, the dollar is rising — against all odds. It’s outshining gold and Bitcoin even as Trump’s Iran war goes sideways. It’s even overpowering the artificial intelligence trade.
Economist Carol Kong at Commonwealth Bank of Australia speaks for many when she says “the dollar is king while this conflict lasts. If we’re right about this conflict being protracted, I think oil prices will just keep rising and it will push the dollar higher, at the expense of net energy importers like the Japanese yen and the euro.”
All this could be a clear and present danger for Asia in 2026. For Asia, having commodity prices “go up when their exchange rates are already weak is doubly painful,” said Harvard economist Kenneth Rogoff.
These stains will intensify as bond markets quake around the globe. The surge in yields from the US to the UK to Japan is altering the calculus far 2026 economic growth and market stability faster than Asia can keep up.