Karishma Vanjani
Plans for looser fiscal policy in Japan have triggered big moves in the yen and Japanese government bonds that have investors increasingly on edge around the world. The focus now is an auction of 40-year government debt that is scheduled for Wednesday in Tokyo.
The latest phase of the drama began this month, after new Prime Minister Sanae Takaichi pitched plans to stimulate the economy by cutting sales tax on food at a time when Japan's debt remains bloated. Total debt is 237% of gross domestic product, the highest ratio in the world, according to the International Monetary Fund
Yields on Japanese government debt took off as investors interpreted the proposal as a potential setback in reining in the government's debt. The yen slid, weakening nearly to 160 to the dollar and worsening earlier losses.
That has led to talk that the Ministry of Finance could be intervening to support it. The currency snapped back, rising as much as 2% this week.
"The big story is, of course, Japanese bonds and the yen. The yen is near a potential breaking point, having now tested the 100-day trendline around Yen154," wrote Rosenberg Research Founder David Rosenberg this morning. "Whatever happens in Japan will not stay in Japan: global bond markets and currencies are watching the push-and-pull."
A recovery in the yen would make U.S. goods more affordable in Japan and help President Donald Trump's administration reduce the trade deficit. Within Japan, a stronger yen would reduce the profits of exporting companies -- examples include Toyota Motor and Nintendo -- and that could upend gains in the Nikkei Stock Average, which is up nearly 6% so far this year.
Jefferies Chief Economist Mohit Kumar expects the yen to recover to less than 150 to the dollar.
But currency interventions can only go so far. "Direct operations often only 'work' temporarily when the broader backdrop justifies the pressures on the currency, as it does today," wrote Kamakshya Trivedi, the chief foreign-exchange and emerging-market strategist at Goldman Sachs.
"A typically more successful approach [to supporting the yen] would be faster and determined hikes by the Bank of Japan," Trivedi added. The BOJ recently raised its benchmark interest rate to the highest since 1995, but it is still just 0.75%.
This month's weakness in the yen has come as the yield on Japanese 40-year bonds rose to a once unimaginable level of more than 4% last week. Yields rise when prices fall.
Bond investors don't like plans that imply a rising debt burden, especially for governments that are already deeply indebted. The defense spending in Europe and the One Big Beautiful Bill Act in the U.S. are other examples of policies that pump money into the economy but raise concerns for bond investors.
"The standard policy prescription for countries with too much debt is to cut spending and raise taxes," Robin J. Brooks, a senior fellow at the Brookings Institution, wrote on Substack last month. Since Takaichi took office in October, the 40-year yield has climbed by 51 basis points, or 0.51 percentage points.
While there has been some recovery in prices of 40-year bonds since last week, a big test is around the corner. Japan is auctioning 40-year bonds on Wednesday, and weak demand would raise the risk of renewed selling.
That is why the whole issue matters for U.S. and European investors. If prices fall, sending yields higher it, it could make Japanese bonds attractive enough for local investors to move money invested abroad back to Japan.
"Any further selloff in JGBs will shift the Japanese investors focus towards the domestic market and away from USTs and European bonds," Kumar wrote. That could push yields higher on U.S. government debt, regardless of whether the Federal Reserve keeps cutting interest rates.
"We note Japan is currently the largest foreign sovereign investor in Agency MBS with $275 billion, including +$10 billion of net purchases last year," BTIG said in a research note on Tuesday. Agency MBS are mortgage-backed securities issued by the likes of Fannie Mae.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com.
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(END) Dow Jones Newswires
January 27, 2026 17:27 ET (22:27 GMT)
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