Japanese Super-Long Bond Weakness: Why We’re Not Sounding the Alarm Bells Just Yet

Concerns about a renewed sharp selloff in Japanese government bonds (JGBs) and a potential spillover into global rates appear overstated. The recent weakness in the super-long end of the JGB curve primarily reflects deteriorating market functionality driven by technical supply-demand imbalances, rather than a fundamental reassessment of Japan’s fiscal sustainability. While marginal fiscal concerns have added to the pressure on the long end, Japan’s deep domestic investor base and its capacity to remain self-funded for decades continue to anchor long-term stability for JGBs.

 Background 

The 30- and 40-year JGB yields soared to record highs on May 22 amid selloffs in long sovereign bonds across the globe. The rising term premium has been a major focus for investors especially in the US, where increasing inflation expectations have pushed up yields at the long end. However, the size and speed of the JGB long bond selloff raised eyebrows among market participants. The year-to-date rise in super-long JGB yields has significantly outpaced those of its G3 peers, a divergence that is atypical (Figures 1 and 2). The moves left some investors wondering whether concerns about liquidity or market function were warranted, or whether the moves reflect a fiscal crisis in the nation.

A weakly-received 20-year JGB auction, held just one day before the underwhelming 20-year US Treasury auction,¹ contributed to the recent globally synchronized selloff of long-end rates and overnight bear steepening. This market reaction was further exacerbated by Prime Minister Shigeru Ishiba’s controversial remark likening Japan’s fiscal position to that of Greece,² a comment that rattled investor sentiment.

In our view, panic is not warranted, due to the following:

• Japan remains fundamentally stable, with household financial assets nearly double the national debt, and the country is mostly self-funded, with roughly 90% of JGBs held domestically.
• The JGB curve dislocation is largely a technical one, driven by reduced insurer demand and supply-demand mismatches—not fiscal deterioration.
• Foreign investors initially filled the gap, but have turned net sellers amid US rate volatility, rising speculation on potential pre-election value-added tax (VAT) cuts in Japan, and Bank of Japan (BOJ) neutrality.
• Potential policy responses from the Ministry of Finance, or MOF (issuance tweaks) and BOJ (QT recalibration) could stabilize the curve and influence global rate dynamics.

Japan Remains Largely Self-Funded

Notably, the JGB yield surge occurred despite the fact that approximately 90% of JGBs are held domestically, and Japan remains largely self-financed, with minimal reliance on external funding. As a reminder, Japanese households hold roughly ¥2,200 trillion in financial assets (primarily in cash and equivalents), a level that is nearly double the national debt of ¥1,350 trillion. These significant savings underscore that the country has a deep domestic funding base.

Recent JGB Dislocation Was Driven by Domestic Technical Supply/Demand Imbalances

The dislocation in the super-long JGB market appears to be more a function of technical supply-demand imbalances than a sustained loss of confidence in Japan’s fiscal position that could trigger another leg higher in global yields. Ownership of the super-long end of the JGB curve has traditionally been dominated by domestic life insurers, who now appear to have limited capacity to absorb additional duration risk. As a result, there has been recent tepid demand from Japanese insurers for extending duration. This is true despite super-long JGBs trading at their cheapest levels since their inception in 1999.

Importantly, this softer demand appears to be technically driven rather than a reflection of fundamental concerns over Japan’s fiscal position. Insurers began lengthening duration in 2020 following the Financial Services Agency’s 2019 announcement of a Solvency II-style regulatory framework, which mandates closer asset-liability interest rate matching and is scheduled for implementation in FY2025. This regulation was followed by a deliberate lengthening of the JGB issuance profile in recent years (Figure 3), largely in response to requests from the life insurance community, which expressed a preference for longer-duration instruments to better align with their liability structures post the introduction of NIRP (negative interest rate policy) in 2016.

The observed decline in JGB purchases by life insurers—from a post 2020 peak of approximately ¥700 billion per month to around ¥100 billion recently—suggests that efforts to close the duration gap may now be largely complete. This trend is further reinforced by a structural decline in demand for insurance-type investment products among younger generations, driven by the introduction and subsequent expansion of the NISA program³ since the 2020s, which has redirected household investment flows toward equities.

Foreigners to the Rescue? Not Really.

More recently, foreign investors have stepped in to absorb the slack in super-long JGB demand, attracted by the relative yield advantage versus their home markets. For EUR- and USD-based investors, the hedged yield on 30-year JGBs—using a 3-month currency hedge—offers a pickup of approximately 160bps over 30-year Bunds and 215bps over 30-year U.S. Treasuries, making Japanese duration increasingly attractive on a currency-hedged basis. However, this flow may have recently halted, with global investors turning into net sellers due to a confluence of factors. First, the Liberation Day selloff in US Treasuries triggered a re-steepening of the curve, prompting position unwinds. Second, speculation around a potential VAT reduction in Japan—possibly aimed at boosting public support ahead of the July Upper House election—has introduced fiscal uncertainty. Third, a dovish or more neutral stance from the BOJ has led to the unwinding of JGB flattener positions by fast-money investors, further pressuring the super-long end.

A Potential Remedy: Countermeasures from the MOF/ BOJ

Given the recent selloff, the question arises: who could step in to stabilize the market? The BOJ is currently evaluating its quantitative tightening (QT) strategy, with interim assessment results expected at the June 17, 2025 Monetary Policy Meeting. One potential outcome could be a recalibration of QT—scaling back operations in the long end of the curve while allowing greater runoff in the front-end maturities.

In parallel, the MOF may also play a role. Similar to the U.S. Treasury Borrowing Advisory Committee (TBAC), the MOF regularly consults market participants on funding strategies, including the balance between coupon issuance and JGB bills. Given the persistent steepening of the yield curve and waning domestic demand for super-long JGBs, it would be reasonable to anticipate some adjustment to the issuance profile in the near term. It appears that a policy response is underway, with the latest MOF headline⁴ reinforcing our view that issuance reductions are being considered—particularly in the super-long sector, where a supply-demand imbalance has left the market temporarily oversupplied.

Spillover Effects

While the cheapening of 30-year JGBs reinforces the case for continued steepening in the US Treasury curve, any technically driven correction—whether through a reduction in MOF issuance or a BOJ QT operation resembling a “Twist”—could signal a pause in the steepening trend within the JGB market. Such a shift would likely have spillover effects across G3 sovereign curves, potentially serving as an early indicator of stabilization and a halt to the broader cheapening of global interest rate curves. This is particularly notable given the pronounced steepness of the JGB curve relative to its G3 counterparts (Figure 4).

The Bottom Line: Mild Indigestion Is Likely to Continue Until 3Q25 Remedy

While we will continue monitoring the path of JGB rates, we do not expect a further major correction. The recent moves relate to technicals rather than fundamental issues with the Japanese fiscal picture. We turn neutral on JGBs at this juncture, given the pronounced steepness of the JGB curve relative to global peers (Figure 4). However, should the 30-year yield rise again to well over 3%, and the 10-year exceed 1.6%, valuations could become increasingly compelling for long-term investors—including those with a currency-hedged mandate.

While the current JGB yield levels are compelling for USD-based investors, we still observe caution in foreign buying activity, as investors await greater clarity on the path of US fiscal spending outlook and potential VAT reduction talks ahead of Japan’s July upper house election.