Japanese Bond Yields Surge Due to Economic and Policy Shifts

Long-term Japanese government bond yields have experienced a significant rise, attributed to various factors including a structural change in nominal growth, according to a report by Qatar National Bank (QNB). The bank’s analysis highlights the impact of shifting political leadership and decreasing institutional demand as critical components behind this trend.

Economic Shifts and Monetary Policy Changes

QNB notes that Japan has transitioned into a new macroeconomic regime following decades of deflationary stagnation and persistently low interest rates. This shift has been exacerbated by the effects of the COVID-19 pandemic and the ongoing Russia-Ukraine war. The resulting supply shocks, alongside a global surge in commodity prices, have fueled inflationary pressures within Japan.

These dynamics have been further amplified by a substantial demand shock, driven by expansive fiscal support and an ultra-loose monetary policy. As global central banks raised interest rates to combat inflation, the interest rate differential with Japan widened. The Bank of Japan (BoJ) maintained its negative short-term policy rate of -0.1 percent, leading to a sharp depreciation of the Japanese Yen (JPY) and intensifying domestic price pressures. By early 2023, inflation had surged above 4 percent, a level not seen in over thirty years.

In response to these pressures, the BoJ initiated a historic process of monetary policy normalization, ending negative interest rates for the first time in 17 years. Since 2024, the bank has implemented four rate increases, totaling 85 basis points. Additionally, the BoJ has concluded its Yield Curve Control (YCC) program, which previously capped the 10-year Japanese Government Bond yields. This shift has led to a reduction of monthly bond purchases, decreasing from approximately JPY 9 trillion at their peak in 2023 to around JPY 3 trillion with further reductions on the horizon.

Factors Influencing Long-term Bond Yields

According to QNB, several key factors explain the rise in long-term JGB yields. Firstly, there is a notable structural shift in Japan’s macroeconomic landscape, moving from a deflationary environment to a more reflationary period characterized by normalized growth and inflation. External shocks from rising imported inflation have quickly influenced domestic economic dynamics, breaking the long-standing deflationary trend.

The annual “Shunto” wage negotiations, which are crucial for determining wage dynamics in Japan, have resulted in wage increases of approximately 5 percent, the highest in several decades. These gains, occurring in a context of acute labor shortages, have strengthened expectations of a permanent upward adjustment in inflation levels.

Higher inflation rates, combined with robust real GDP growth driven by strong exports and a revival in corporate investment, have bolstered nominal GDP growth. While annual nominal GDP growth averaged only 0.1 percent from 2000 to 2020, projections for the period from 2021 to 2025 indicate an acceleration to an average annual growth rate of 3.7 percent.

As a result, investors have adjusted their views on equilibrium interest rates, contributing to an increase in long-term yields.

Secondly, the emergence of Sanae Takaichi as Prime Minister in October 2025 has solidified expectations for ongoing nominal growth in Japan. Takaichi advocates for more aggressive fiscal policies aimed at fostering stronger growth and enhancing industrial policy, while deprioritizing debt reduction and central bank independence. Her leadership strengthens expectations for more substantial economic growth and inflation, particularly if fiscal policy becomes more expansive. Long-dated bonds, especially those with durations exceeding 30 years, are particularly sensitive to changes in nominal growth, indicating a break from the previous assumption of near-zero growth.

Lastly, regulatory shifts and balance sheet considerations have diminished domestic institutional demand for JGBs. Japan is transitioning from a solvency framework based on book value to a market-oriented system that penalizes interest rate risk and duration mismatches. Consequently, traditional domestic investors, particularly life insurers, have reduced their demand for JGBs. This decline is significant, given that life insurers previously accounted for approximately 35 percent of net issuances for long JGBs, resulting in reduced purchases by several trillion JPY annually.

In conclusion, QNB posits that the increase in long-term JGB yields is a reflection of a structural shift in nominal growth, influenced by changes in political leadership and diminished institutional demand amid regulatory reforms. This trend marks Japan’s transition toward a more conventional monetary and macroeconomic environment following decades of deflationary dynamics.