While global investors remain fixated on the artificial intelligence (AI) boom, a dramatic scene is unfolding in the bond market of the world's third-largest economy. The yield on Japan's 10-year government bonds (JGBs) has surged consecutively this week, approaching the 3% level—a high not seen in thirty years. The yields on ultra-long-term bonds have even surpassed those of Germany and are nearing Spain's levels. In response, Albert Edwards, a prominent strategist at Société Générale, has issued a stark warning: the current market anomalies in Japan bear a striking resemblance to the "mini-budget" crisis triggered by former UK Prime Minister Liz Truss in 2022, potentially signaling the brewing of a financial storm powerful enough to impact global asset valuations.
Bond Market Turmoil: Surging Yields and Steepening Curves
This week, Japan's government bond market has faced relentless selling pressure. On Thursday, the 10-year JGB yield climbed to 2.88%, reaching its highest level since September 1996 and marking its ninth consecutive day of gains—the longest winning streak in nineteen years. The yield on 20-year bonds also soared to multi-decade highs. Concurrently, indicators measuring inflation and term risk deteriorated sharply. On Wednesday, the spread between 10-year and 2-year bond yields widened to 143 basis points, the widest level since 2004, signaling a rapid reassessment of long-term price risks even as short-term expectations for central bank rate hikes are cooling.
"The latest steepening of the yield curve is a warning siren from investors," stated Kento Minami, a senior economist at Daiwa Securities. "There is a clear disconnect between the risks the market is pricing in and the government's fiscal and monetary policies." Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management, further pointed out that this reflects market concerns that the Bank of Japan will be unable to raise interest rates quickly enough. Despite yields reaching multi-decade highs, they have yet to entice buyers back into the market. The demand indicator for 10-year bonds issued last week fell to its lowest level since April. Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management, noted that compared to Japan's current inflation levels, the 10-year bond yield remains relatively low, and as prices are expected to rise further, yields will inevitably have to follow.
Sanae Takaichi's "Truss-Style" Fiscal Gambit Fuels Distrust
The catalyst igniting this wave of market unease is the fiscal expansion blueprint under Prime Minister Sanae Takaichi's leadership. The government has disclosed plans to mobilize over 370 trillion yen (approximately $2.28 trillion) in public-private investment by the 2040 fiscal year. Simultaneously, it is considering reducing the consumption tax on food to 1% without specifying a funding source for this tax cut. An economic blueprint released last month reinforced a market perception: the Takaichi administration views loose monetary policy as a prerequisite for achieving its public-private collaborative growth investments and is therefore "unlikely to welcome" arguments for rate hikes. Analysts at Mizuho Securities noted in a report that this severely constrains the Bank of Japan's room to tighten policy. Although the Takaichi government has attempted to reassure markets by promising that new spending will be covered by tax revenue growth and improved administrative efficiency, not by new debt issuance, and insists that faster economic growth will reduce Japan's debt-to-GDP ratio exceeding 200%, investors are clearly unconvinced. Sources indicate that the Japanese government is even considering revising the wording of its economic blueprint to quell the bond sell-off. However, the foreign exchange market has already signaled distrust: despite a significant relative rise in Japanese bond yields, the yen continues to weaken persistently, a complete departure from traditional economic logic.
SocGen's Deep Dive: From "Truss Moment" to AI Bubble Resonance
Faced with Japan's peculiar market dynamics, SocGen strategist Albert Edwards highlighted its severity in his latest Global Strategy Weekly. He argues this is not merely a bond market correction but is evolving into a more dangerous loss of confidence. "Investors have grown accustomed to the halving of the yen's real value since 2010, so there's no sense of crisis," Edwards wrote. "But this round of decline feels entirely different to me." He believes the Bank of Japan's sustained suppression of government bond yields below market-driven levels through quantitative easing has triggered a backlash in the currency market. He directly compares this scenario to the UK's "Truss Moment" in 2022: "The last time we saw this kind of market confidence loss in a G7 country was in September 2022 when then UK Prime Minister Liz Truss lost control of the markets." Now, Japan's yield curve has significantly diverged from other major global economies. Edwards likens the market to disgruntled fans shouting at policymakers: "You have no idea what you're doing."
The shockwaves from this storm extend far beyond Tokyo. Edwards poses a pointed question to global investors: If the 10-year JGB yield continues to climb towards 4% or even higher, can the US stock market's current forward price-to-earnings ratio of over 20 times still be justified? His answer is unequivocal: "I don't think so." For decades, Japan's suppressed bond yields and excess quantitative easing liquidity have provided a massive tailwind for global equity and bond valuations. A normalization of Japanese yields would reverse this trend, draining the global pool of cheap capital at its source.
What makes Edwards even more vigilant is a recent warning from the Bank for International Settlements (BIS) that the current AI investment boom, should its economic benefits fall short of expectations, could evolve into a "protracted investment bust." The report explicitly compares the current situation to previous boom-bust cycles fueled by technological breakthroughs—from the canal mania of the 1830s and railway expansion of the 1840s to the internet frenzy of the late 1990s. They all share a common feature: "Genuine technological breakthroughs attract a flood of capital, but the eventual commercial returns fail to justify such massive investment." Edwards specifically mentions the telecom sector during the late-1990s TMT bubble, seeing a high degree of similarity with the present. That competitive capacity expansion, fueled by investors' cheap money, ultimately led to a collapse in the real investment cycle and a stock price crash. "Those who lived through that period will never forget it," he emphasized.
The Bank of Japan raised its short-term policy rate to 1% in mid-June, and swap markets imply an 87% probability of another 25-basis-point hike in December. However, the market seems convinced that this pace of tightening is far from sufficient in the face of returning inflation and the Takaichi government's fiscal expansionary impulses. Daiwa Securities' Kento Minami warns: "Given that Japan is experiencing inflation, it is crucial to implement fiscal and monetary policies that match the real economy."
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