Japan and the US Become Sources of Global Market Turmoil

Reference News Network, January 23 report: According to the website of the "Nikkei Business Newspaper", Japan and the United States have become sources of tremors in the global financial market. In Japan, as the next general election approaches, both ruling and opposition parties have clearly proposed the idea of reducing the consumption tax, which has caused concerns about the country's fiscal soundness and led to turmoil in the government bond market. The sharp rise in long-term interest rates has had significant spillover effects, causing U.S. interest rates to rise to their highest level in nearly five months. Due to the conflict between the United States and Europe over the issue of Greenland, an autonomous territory of Denmark, the market has worried about a slowdown in economic growth, leading to a drop in stock prices. The upward trend in global stock markets since the beginning of the year has already shown signs of weakness.

In the Japanese domestic bond market on the 21st, the yield on newly issued 30-year government bonds fell (corresponding to a rise in bond prices) to 3.71%, down 0.165 percentage points from the previous trading day, while the yield on newly issued 40-year government bonds fell to 4.04%, also down 0.165 percentage points from the previous trading day. This reflected a reverse correction of the historic surge the day before. The yield on newly issued 10-year government bonds, a key indicator of long-term interest rates, fell to 2.28%, down 0.09 percentage points from the previous day.

However, the turbulence has not subsided, with limited trading volume. Takamitsu Yuki, head of the securities department at Woori Life Insurance Company, admitted: "We first reassessed whether there were any government bonds that might be written down." He expressed caution about further purchasing government bonds, pointing out, "Even without specifically buying longer-term government bonds with higher fiscal risks, it is already sufficient to exceed the expected interest rate."

The turbulence in Japan's bond market on the 20th affected the global market. U.S. long-term interest rates once rose to 4.3%, reaching a new high since August 2025, while interest rates in the UK and Germany also reached two-week highs.

Despite the ruling and opposition parties in Japan competing to propose lowering the consumption tax, it remains unclear how to secure funding sources. Overseas investors, whose influence is increasingly strong in the ultra-long-term bond market, are casting a critical eye on the Japanese market.

James Malcolm of JB Drake in the UK believes that the root of the chaos lies in "irresponsible fiscal policy." He pointed out: "Prime Minister Hayashibara constantly claims that 'the scale of fiscal deficit and issuance is small, so it's okay,' which is completely different from the actual situation felt by the market."

It has been reported that Vanguard Group in the U.S. has stopped continuously purchasing ultra-long-term government bonds. It seems that the concern about Japanese government bonds globally is unlikely to subside in the short term.

The stock market has also begun to prepare for rising interest rates. On the 21st, the Nikkei Average closed at 52,774 points, down 216 points (a drop of 0.4%) from the previous day. This was the first time in a year that the index recorded five consecutive days of declines, with a cumulative drop of over 1,500 points during this period.

Market optimism that, following Prime Minister Hayashibara's decision to dissolve the House of Representatives, the ruling party would win the election and improve policy implementation capabilities, was rapidly fading.

Real estate stocks are a typical example. Mitsui Fudosan's share price fell by 2% on the 21st, almost erasing its gains this year. Although the buying pressure that had previously favored real estate's "inflation-hedging ability" dominated, the growing burden of interest expenses on increasing debt has become hard to ignore.

Data from the Bank of Japan's fund circulation statistics show that banks and other deposit institutions hold about 10% of Japanese government bonds. Due to the challenges low interest rates pose to investments, some financial institutions have increased their investment in relatively higher-yield ultra-long-term bonds.

Movements of British corporate pension funds have exacerbated the turmoil in the government bond market, whereas Japan's situation differs from that of the UK, where selling due to unrealized losses by financial institutions could become a trigger for market fluctuations.