Land of the Rising Yields
Will Japan’s quiet shift catch complacent markets off guard?
Key Highlights
Japan’s bond market is sending a signal global investors may be underestimating.
The Bank of Japan’s subtle shift marks a turning point after decades of ultra-easy policy.
Global equities remain buoyant, but parallel moves into safe havens suggest quiet hedging.
Rising yields, not geopolitics, may be the more important risk catalyst into February.
A Calm Market Masking a Subtle Shift
The final full week of January unfolded against a backdrop of reassuring headlines and quietly building tension. Equity markets in the United States and Europe edged higher, volatility eased, and Japan’s stock market extended its record-setting run.¹ At the same time, traditionally defensive assets such as gold also advanced sharply, an unusual pairing that hinted at underlying unease.¹ Investors appeared comforted by cooling inflation data and a partial de-escalation of trade rhetoric, reinforcing confidence in a soft-landing narrative as January drew to a close.¹
Yet beneath the surface, the week’s most important development did not originate in Washington or Brussels. It emerged from Tokyo.
The Bank of Japan left its policy rate unchanged, but its tone marked a clear departure from the past. Policymakers modestly raised their inflation forecasts, and one board member voted in favor of a rate hike.² For a central bank that spent decades fighting deflation and anchoring yields near zero, the symbolism mattered. Bond markets reacted quickly. Japanese government bond yields surged, with the 10-year yield reaching levels not seen in nearly three decades.²
Governor Kazuo Ueda acknowledged that yields were rising rapidly and emphasized the central bank’s willingness to intervene if moves became disorderly.² Even so, the message was clear. Japan is no longer the passive anchor of global rates it once was. December inflation slowed slightly but remained above target, reinforcing the idea that Japan’s price regime has structurally changed.³
Paradoxically, the yen weakened following the meeting, reflecting expectations that policy normalization would remain gradual.² That response reopened discussion around the yen-funded carry trade and highlighted how deeply ingrained assumptions about Japan remain in global portfolios.
Japan’s Political and Market Ripple Effects
Japan’s influence on global markets extended beyond monetary policy. Prime Minister Sanae Takaichi dissolved the lower house of parliament and called a snap election for early February, seeking a renewed mandate just months into her term.⁴ Markets interpreted the move as supportive of continued fiscal stimulus, helping propel Japanese equities further into record territory. The Nikkei 225 climbed above 53,000, a milestone few would have imagined even a year ago.⁵
That equity optimism, however, came with a cost. Expectations of heavier government spending contributed to renewed selling pressure in Japanese bonds and further weakness in the yen.⁵ Rising debt issuance and higher yields are no longer theoretical concerns. They are actively shaping market behavior.
