Japan's long-bond yields surge to record highs. Why it may be a problem beyond Tokyo.

By Jamie Chisholm

A woman walks past electronic quotation boards displaying 10-year government bonds (L), and the foreign exchange rate of Japanese yen against the the US dollar (R) in Tokyo on January 19, 2026.

Japan's long-bond yields surged to record highs on Tuesday, pushing up global borrowing costs, as investors balked at the prospect of tax cuts and a sharp increase in government spending.

The 40-year bond yield BX:TMBMKJP-40Y spiked 27 basis points to 4.215%, trading at its highest level since the maturity was introduced in 2007.

The lurch higher in JGB yields comes as investors worry that if Prime Minister Sanae Takaichi consolidates her position after an election on Feb. 8, she will be able to undertake a large fiscal boost for the economy at a time when the country is already struggling with high levels of government debt.

"The prospect of a win for Takaichi, who has promised an expansionary fiscal policy when the Japanese debt to GDP ratio is already nearly 250%, is causing a major upset in the Japanese bond market," said Kathleen Brooks, research director at XTB.

The sell-off in Japanese bonds infected other sovereign paper, with 10-year U.S. Treasury yields BX:TMUBMUSD10Y up nearly 6 basis points to 4.285%, near the highest since August, and German 10-year yields BX:TMBMKDE-10Y adding 2.8 basis points to 2.870%.

Now that fiscal risk is back in bonds "long-maturity Treasuries are reacting to a myriad of tariff threats and Japan, putting a retracement to pre-GFC highs back in focus," said Ben Emons of Fed Watch Advisors. The GFC refers to the global financial crisis of 2008, just before which 30-year Treasury yields BX:TMUBMUSD30Y traded above 5%. They are currently 4.918%.

Matt Maley, chief market strategist at Miller Tabak, said the reaction in JGBs showed "there is some serious pushback on some of the fiscal plans she [Takaichi} is putting forth...which will only make their budget deficit worse," and he fears that the reverberations are likely eventually to be felt beyond fixed income markets.

Japan's Nikkei 225 JP:NIK rallied to a record high last week even as 10-year JGB yields more than doubled since last April, Maley noted. But he added: "The problem with this is that history shows that whenever long-term yields rise in a substantial manner in a country...it becomes merely a matter of time before it has a profoundly negative impact on their stock market."

"[T]his is something that should create headwinds for the [U.S.] stock market for more than just a few days...and thus investors should act accordingly," Maley said. In early Tuesday trading the S&P 500 SPX was down 1.4%.

The slide in Japan's bond prices, which move inversely to yields, come after Takaichi in November proposed a $135 billion spending plan, and on Monday pledged to suspend for two years the country's sales tax on food.

"Japan can't afford tax cuts right now, and unless the BOJ intervenes it is hard to see how yields will normalize," XTB's Brooks said.

Japan's benchmark 10-year yield BX:TMBMKJP-10Y also rose, climbing 7.3 basis points to 2.344%, the highest this century.

The 20-year bond yield BX:TMBMKJP-20Y jumped 19.6 basis points to 3.454%, also a multi-year peak, after an auction of the same maturity on Tuesday saw meek demand.

Colin Finlayson, investment manager at Aegon Asset Management, said foreign bond markets are at risk.

"The ferocity of the recent sell off has the potential to spill over into other government bond markets, with the medium/long term potential for offshore investments to return 'home' to Japan increasing with each move higher in yields," he said.

-Jamie Chisholm

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01-20-26 1031ET