Japan 40-Year Bond Yield Reaches 4% Amid Election Tensions

Japan's 40-year government bond yield reached 4% on Monday for the first time since these bonds started trading in 2007. This happened in Tokyo as Prime Minister Sanae Takaichi called for snap elections on February 8. Investors worry that the vote could lead to more government spending, like cutting the sales tax on food, which might hurt the country's finances.

Background

Japan has kept interest rates very low for years. The Bank of Japan has bought lots of bonds to hold yields down. This made Japanese bonds different from others around the world, where yields stayed higher. For a long time, Japan's 10-year bond yield hovered below 1%, while places like the US saw yields over 4% at times.

That changed over the past year. Yields started to climb as the Bank of Japan hinted at less bond buying. By late 2025, the 30-year yield passed 3%. Now, the 40-year yield at 4% marks a big shift. It is the highest for any long-term Japanese government bond since the 20-year yield hit a peak in December 1995.

Politics added fuel to the fire. Prime Minister Takaichi, leading the Liberal Democratic Party, faces a thin majority in parliament. On Monday, she announced elections for February 8 to try to strengthen her position. Her party talks about cutting the 10% sales tax on food to help families with rising costs. Opposition groups push the same idea. A new group called the Centrist Reform Alliance formed from a former ally and the main opposition party. They all want to scrap the food tax, at least for a while.

These plans worry bond traders. Cutting taxes means less money for the government. Japan already has a huge debt pile, over twice the size of its economy. More spending without new taxes could push debt higher. Traders sell bonds when they fear this, which drives yields up. Higher yields mean the government pays more to borrow.

"The market is sending clear signals about what this election could mean for fiscal policy," said an economy reporter on a recent broadcast.

The yen strengthened a bit as yields rose. Investors see higher yields as a sign Japan might tighten policy. But authorities watch closely, ready to step in if the currency moves too fast.

Key Details

The 40-year bond yield jumped 5.5 basis points on Monday to hit 4%. That is 0.055 percentage points. Data shows it reached 3.95% earlier in the day before pushing to 4%. The 30-year yield sits at about 3.7%, higher than Germany's at 3.5%. Shorter bonds also rose: the 20-year yield hit levels not seen since 1999.

Ahead of a 20-year bond auction on Tuesday, traders stayed cautious. Bond sales have picked up speed in recent weeks. The 40-year yield rose 0.23 points in the past month and 1.23 points from a year ago. Back in early January 2026, it traded around 3.6%.

Political Moves

Prime Minister Takaichi made the election call during a briefing on Monday. Her party lost ground in recent votes, leaving it with a slim edge. The snap vote aims to lock in support before opposition gains more steam. Promises of tax cuts on food aim to win voters hit by price rises. Food prices in Japan have gone up 5-10% in the last year due to global issues and a weak yen.

The Centrist Reform Alliance merger adds pressure. This group now pushes hard for tax relief. If they gain seats, talks on budgets could get messy. Government needs to fund the tax cut somehow, maybe by borrowing more or cutting elsewhere.

Bond market moves spread to stocks and currency. Tokyo shares dipped as yields climbed. Yen futures showed some buying. Traders eye the Bank of Japan for any response. The central bank meets soon and might adjust its bond plans.

What This Means

Higher yields change how Japan borrows money. The government pays more interest on new debt. With debt already at 250% of GDP, this adds strain. Banks and pension funds holding bonds see paper losses as prices fall. Bond prices drop when yields rise.

For everyday people, mortgage rates might creep up. Many Japanese homes have variable rates tied to short-term yields, but long-term trends could filter through. Companies face higher costs to borrow for years ahead.

The election on February 8 could shift policy. If Takaichi's party wins big, tax cuts might happen fast. Opposition strength could force compromises, maybe delaying spending. Either way, markets expect more debate on debt.

Globally, Japan's move matters. It holds many foreign bonds. Selling Japanese debt might buy assets elsewhere, affecting US and European markets. Yields here now top some peers, drawing investors seeking return.

Forecasts see the 40-year yield easing to 3.44% by quarter's end, then 3.15% in a year. But election risks keep traders on edge. If spending plans grow, yields could stay high or climb more.

Japan's low-yield era seems to fade. This forces hard choices on taxes, spending, and rates. The bond market watches every step as the vote nears.