Japan’s 10-year government bond yields climbed to their highest level since 2009 on Thursday, driven by a global bond sell-off triggered by Germany’s decision to ramp up defense spending. The yield on the 10-year Japanese Government Bond (JGB) rose 0.06 percentage points to 1.5%, marking an increase of nearly 0.4 percentage points since the start of 2025.
The sell-off was sparked by Germany’s historic agreement to allocate hundreds of billions of euros to defense and infrastructure, leading to the largest spike in German bond yields in 28 years. This rise in borrowing costs has reverberated across global markets, with UK bond yields also climbing amid expectations of higher fiscal spending.
Asian market traders described the move as sentiment-driven, with no clear indication of which investors were behind the selling. Typically, major Japanese banks and institutions buy JGBs in March ahead of the end of Japan’s financial year, making this trend unusual.
Beyond the global contagion from Germany’s bond turmoil, a shift in expectations regarding Japan’s economy has also contributed to rising JGB yields. Stronger-than-expected economic growth and persistent inflation above the Bank of Japan’s (BoJ) 2% target have fueled speculation that the central bank could adopt a more hawkish stance.
The BoJ has raised interest rates twice over the past year as part of its gradual exit from ultra-loose monetary policy. Investors are now betting on another rate hike, with some traders anticipating a move as soon as the BoJ’s next meeting in March. However, the majority of economists still forecast the next rate increase will come in July.
BoJ Deputy Governor Shinichi Uchida underscored the uncertainty surrounding Japan’s interest rate outlook in a speech on Wednesday. He highlighted geopolitical tensions and potential shifts in U.S. policy as factors that could impact Japan’s economy and inflation trajectory.
Despite the bond market turbulence, the Japanese yen remained stable in early Thursday trading, hovering around ¥149.2 per U.S. dollar. Japanese stocks, meanwhile, posted gains, with the broad Topix index rising 1.2% in the morning session.
Defense-related stocks saw a particularly strong rally, with shares of Mitsubishi Heavy and Kawasaki Heavy surging 10% and 9.8%, respectively. Investors are betting that Japan will follow Germany’s lead by further increasing its military spending in response to rising global security concerns.
