Japan’s surging bond yields test global markets ahead of central bank decisions

Japan's 10-year government bond yield hit 2.90% in early July — its highest level since September 1996 — before easing to around 2.77% on July 27, as a confluence of Bank of Japan policy normalization and fiscal expansion under Prime Minister Sanae Takaichi's administration reshapes global bond markets ahead of a week packed with central bank decisions.

A Structural Shift in Global Rates

The surge in Japanese government bond yields marks what analysts describe as the end of Japan's decades-long role as the world's low-yield anchor. The BOJ raised its policy rate to 1.0% in June and has slashed monthly bond purchases from ¥5.7 trillion in August 2024 to ¥2.9 trillion in early 2026. Meanwhile, the Takaichi government's large spending plans, outlined in a fiscal policy blueprint last month, have further pushed yields higher.investing+3

Reuters reported that the 10-year yield marked nine consecutive days of gains before peaking, its longest winning streak in years. On the fiscal side, Takaichi has abandoned Japan's longstanding annual primary budget surplus target in favor of a vaguer multi-year assessment of public finances, a move that alarmed bond investors when first announced in late 2025.reuters+1

Carry Trade Under Pressure

The rising yields are drawing attention to the vulnerability of one of the world's largest carry trades. According to a July 21 analysis from W1M, the 10-year U.S.-Japan Treasury spread has narrowed to roughly 180 basis points, down from about 360 basis points at the start of 2025. On a currency-hedged basis, some institutions now find that a 10-year U.S. Treasury yields less than a comparable JGB.w1m

Japan's finance ministry has encouraged major pension funds, including the ¥300 trillion Government Pension Investment Fund, to allocate more capital domestically — a shift that could generate hundreds of billions of dollars in repatriation flows. Speculative yen short positions tracked by the CFTC stand near 124,000 contracts, close to levels seen before the sharp yen rally of 2024.w1m

A Week of Central Bank Decisions

The Federal Reserve is expected to hold rates steady at 3.5%–3.75% when it announces its decision on Wednesday, July 29, though rising oil prices have pushed the probability of a hike to 38% from 12% a week earlier, according to CME FedWatch. The Bank of England is forecast to maintain its rate at 3.75% on Thursday, while the BOJ meets July 30–31 with markets expecting no change.cbsnews+4

The convergence of these decisions, set against structurally rising Japanese yields, leaves global bond markets in what one Investing.com analysis called "a slow-burn tightening of global financial conditions that forces markets to reprice risk across bonds, equities, and currencies over time".investing