Japan’s bond market hits turbulence: why global investors are watching, and what it could mean for India

Japan’s government bond market has slipped into one of its most volatile phases in years, with long-term yields jumping to their highest levels in decades. The sell-off has been steepest in the 20-40 year segment -- areas that usually trade calmly -- forcing the Bank of Japan to step in with bond buying to steady the market at times. What started as routine repositioning after the BOJ’s gradual exit from ultra-easy policy has now turned into a larger and more uncomfortable sell-off.

A bond-market scare driven by fiscal worries, not just the BOJ

The concern has shifted from ‘What will the central bank do next?’ to a broader question: ‘Is Japan’s fiscal position becoming a problem for markets?’ Investors are reacting to expectations of heavy bond issuance, wide budget deficits and the political difficulty of tightening fiscal policy quickly.

With debt levels already among the highest in the world, markets now want higher rewards for the risk of holding Japan’s longest-dated bonds. This has fed into a renewed version of the “sell Japan” trade -- shorting JGBs, betting on a weaker yen, and trimming selected equity exposure as discount rates rise. The yen’s slide has added pressure by raising the risk of imported inflation and complicating the BOJ’s policy stance.

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How rising JGB yields can spill over into global markets

Japan plays an outsized role in global capital flows because its institutional investors are among the largest holders of foreign bonds, equities and alternative assets. When JGB yields rise meaningfully, the relative appeal of overseas investments narrows. This can trigger repatriation -- Japanese investors bringing money back home because domestic yields finally offer a higher or more comfortable return.

Repatriation can matter in several ways. First, Japanese funds may reduce exposure to US Treasuries, European sovereign bonds or emerging-market debt -- this could lift global bond yields as they sell. Second, hedging costs in currency markets can shift quickly as Japanese investors change the mix of their overseas holdings -- this could add volatility to the dollar, euro and several Asian currencies. And third, a general preference for domestic assets can tighten liquidity in global risk markets, especially at a time when many investors are already cautious about global growth and geopolitics.

What it means for India

India is not immune to this chain reaction. Although foreign participation in Indian government bonds remains moderate by global standards, the country has become a more visible destination for global flows after its inclusion in major bond indices. A spike in JGB yields can lift global risk-free benchmarks and, by extension, influence yield expectations in India.

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Higher global yields often translate into firmer long-term borrowing costs, pressure on growth-sensitive equities, and bouts of currency volatility as the dollar strengthens against a weaker yen and other Asian currencies. For equity investors, the bigger risk comes from a shift in global sentiment: sudden volatility in Japan often prompts investors to de-risk across emerging markets even when fundamentals are unchanged.

That said, India also benefits from a cushion: strong domestic liquidity, deepening institutional flows, and a macro backdrop less directly dependent on Japanese funding. But if Japan’s fiscal concerns evolve into a prolonged bond-market turbulence, global asset allocators will reassess risk premia across markets -- including India -- with higher global rates forming the baseline.

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