Japan’s bond market is making headlines again and it could have major implications for stock market investors worldwide.
Bond yields have surged to multi-year highs as the Bank of Japan (BOJ) winds down years of ultra-loose monetary policy.
Once known for rock-bottom yields, Japanese government bonds (JGBs) suddenly offer competitive returns.
As I write, here are the yields and changes (in basis points) in JGB. Rising yields indicates less demand for government debt and will mean government debt becomes more expensive to service.
| Bond maturity | Yield (%) | Change (1 month, bp) | Change (1 year, bp) |
|---|---|---|---|
| 2-year | 0.79 | +3.4 | +47.7 |
| 5-year | 1.09 | +7.1 | +52.3 |
| 10-year | 1.59 | +13.9 | +56.8 |
| 20-year | 2.63 | +24.7 | +77.5 |
| 30-year | 3.17 | +26.2 | +100.5 |
Why should investors care?
So, why should investors in the UK care? Because the consequences of a Japanese debt crisis could be global. And that may hit stock markets right where it hurts.
For decades, Japan’s low rates powered the ‘yen carry trade’, fuelling equity rallies abroad — including in US tech stocks — as investors borrowed cheaply in yen and ploughed the proceeds into riskier, higher-yielding assets overseas.
But as Japanese yields spike, those investors may start repatriating huge sums back to Japan as the equation shifts. That could mean dramatic outflows from global stock markets, especially in areas most exposed to foreign capital.
What’s more, Japan’s debt burden is now exceptionally high, with its debt-to-GDP ratio above 260%, the highest in the developed world (although Japanese net debt is lower).
Confidence in the stability of Japanese government bonds is being tested and that could spread to other nations with increasingly unsustainable debt… like the UK.
If a crisis of confidence erupts, that could roil not only Japan’s economy but send shockwaves through equity markets globally.
Should investors panic? No. But it’s certainly a concern. Investors with heavy holdings in markets like the US or global tech should keep a watchful eye on Japanese bond developments.
One to watch
Despite ongoing anxiety over Japan’s sovereign bond market, the country’s Mizuho Financial Group (NYSE:MFG) has performed well in 2025.
The stock is up 11.6% year-to-date and nearly 20% over the past 12 months, outpacing much of the Japanese banking sector.
Forward-looking valuation remain relatively undemanding. Mizuho trades on a price-to-earnings of 10 times in 2025, falling to 9.2 times in 2026 and 8.4 times in 2027. Interestingly, this is a bit of a premium versus British banks.
This is coupled with an attractive dividend yield. It sits at 3.59% for 2026, 3.77% for 2027, and 3.88% for 2028.
As one of the largest holders of JGBs among Japanese banks, Mizuho is exposed to both the risks of rising yields and the challenges associated with the BOJ reducing its bond purchases.
In the wake of recent bond market volatility, Mizuho has been managing its securities portfolio “very conservatively” and reduced its holdings of both Japanese and foreign government bonds.
It’s an interesting stock to consider in the current environment. However, while Mizuho could benefit from a gradual, orderly unwinding of the carry trade through improved domestic margins, sudden or chaotic changes would likely be disruptive and pose direct financial risks.
I’ve actually got this one on my watchlist simply because I have no Japan exposure. It could be worth broader consideration from UK investors.
