The nomination of two new members to the Bank of Japan's monetary policy committee, widely viewed as holding strongly dovish stances, by the new government led by Prime Minister Sanae Takaichi on Wednesday has triggered significant market movements. Following a brief rise during Asian morning trading, the exchange rate of the yen against the US dollar quickly reversed course and turned lower. Concurrently, the yield on Japan's 40-year government bond surged rapidly to the significant 3.6% level, while yields on 10-year and 20-year Japanese government bonds also moved higher in tandem.
Investors are being alerted to the spillover effects from the sudden sell-off in long-term Japanese bonds during Wednesday's trading session, which appears to be spreading to global equity and bond markets. The yield on the 10-year US Treasury note, often referred to as the anchor for global asset pricing, advanced towards 4.1%. Some seasoned Wall Street analysts have expressed concern that the wave of selling in Japanese bonds could lead to a global crash in stocks and bonds, potentially triggering a super-collapse across global equities, bonds, and currencies similar to the "Black Monday" event in early August 2024. The prospect of "panic selling of stocks and bonds from Tokyo to Wall Street" may be looming once again.
Analyzing the event itself—the Takaichi government, which secured a majority in the House of Representatives, nominating two scholars perceived as dovish/reflationists to the BOJ policy board—the core signal interpreted by the market is that the Takaichi cabinet prioritizes growth and fiscal stimulus over interest rate hikes and fiscal restraint. Consequently, market expectations for the speed of the Bank of Japan's monetary tightening have been substantially dampened. The immediate weakening of the yen is therefore not surprising. More critically, fixed income pricing is exhibiting a "twist-steepen" dynamic, where yields on ultra-long-term Japanese government bonds are accelerating upwards. This is primarily because a more dovish combination of fiscal and monetary policies tends to heighten concerns about inflation and government bond supply, while also significantly boosting market expectations for term premiums.
Data shows that yields on 40-year and 30-year ultra-long Japanese Government Bonds (JGBs) both rose sharply by more than 10 basis points during afternoon trading in Asia, while the yen completely erased its earlier strong gains against the US dollar. The nominees are Professor Ayano Sato of Aoyama Gakuin University and Professor Toichiro Asada of Chuo University—two economists closely associated with "reflation" and MMT-style fiscal stimulus policies. They are slated to replace outgoing BOJ policy board members Hajime Noguchi and Junko Nakagawa.
Senior fixed-income strategist Tatsuya Kimura from asset management giant AXA Investment Managers noted, "Both Asada and Sato are well-known for their persistently accommodative monetary policy stances and positive attitudes towards aggressive expansionary fiscal policy." Kimura added, "This selection completely contradicts investors' previous assessments of the interest rate path—the majority had believed appointing at least one hawkish member prioritizing fiscal soundness would curb further depreciation of the yen."
These latest nominations come as the yen faces intense selling pressure, following a report last week that Prime Minister Takaichi expressed concerns about further rate hikes during a meeting with BOJ Governor Kazuo Ueda. Although market observers had anticipated the newly-elected Prime Minister, who just secured a majority for her ruling party, would shift towards more market-friendly policies, her preferred policy direction appears even more dovish than expected. This could complicate the timing of the Bank of Japan's next rate hike and potentially lead to accelerated yen depreciation and a spike in long-term Japanese bond yields.
Against the backdrop of persistent yen weakness, Japan's key inflation gauge has remained above the Bank of Japan's 2% long-term target for four consecutive years, signaling an end to the country's long era of deflation. However, high prices have subsequently become a major domestic economic challenge. Public dissatisfaction with rising living costs was a key reason for the ruling LDP's significant electoral setbacks prior to Takaichi assuming the party leadership in October last year.
"The decline in Japanese government bond prices is accelerating—meaning yields are rising sharply—and there is room for further declines in the coming days," said macro strategist Ven Ram from Bloomberg Strategists. "Following the government's nomination of two well-known economists publicly inclined towards a reflationary economic agenda, the 30-year JGB yield is leading a broad steepening of the Japanese yield curve. Meanwhile, a report earlier this week also suggested that Prime Minister Takaichi had pressed BOJ Governor Ueda on her reluctance to see further interest rate hikes."
Masamichi Adachi, chief economist at UBS Securities Japan Co., expressed surprise at the nominations, noting that both candidates are outright reflationists. Against the backdrop of a weak yen and inflation sparking discussions about further rate hikes, this personnel choice highlights Takaichi's strong personal inclination, Adachi pointed out.
Overnight index swaps indicate a probability of about 60% for a rate hike announcement at the BOJ's April monetary policy meeting, while the market has fully priced in a 25-basis-point hike by July.
Traders from Tokyo to Wall Street are on high alert. Is a major rout in the Japanese government bond market about to make a comeback? Expectations for BOJ rate hikes have been steadily increasing since 2025. This, combined with the Takaichi government's preparations to cancel a two-year food tax and announce an enormous new stimulus plan potentially reaching ten trillion yen, has caused the dreaded "term premium" phenomenon to cross the Pacific from the US and sweep through Japanese stock, bond, and currency markets. The ultimate result has been a collective surge in long-term JGB yields since the start of the year, alongside continued yen depreciation.
With the rate hike cycle exerting ongoing pressure, and under the long-term dominance of Takaichi's stimulative fiscal policies, yields on 10-year and longer-term Japanese government bonds, driven by term premiums, could continue to set new record highs until the Bank of Japan signals a pause in its tightening cycle.
It is widely known that Japan holds massive overseas assets. Therefore, if long-term Japanese bond yields were to spike dramatically in the short term, it could trigger Japanese overseas investment institutions to sell highly liquid assets like US stocks, US Treasuries, and European bonds to cover massive losses from the JGB plunge. Alternatively, it could trigger a large-scale repatriation of substantial profits from overseas assets back to Japan to embrace higher-yielding yen-denominated assets. Such moves could potentially lead to a global crash in stocks, bonds, and currencies akin to the August 2024 "Black Monday" event, a risk that warrants investor vigilance.
As previously indicated, the market's core interpretation of the Takaichi government's nomination of two perceived dovish members to the BOJ policy board is that her cabinet prioritizes growth and fiscal stimulus over rate hikes and fiscal restraint. Asada is described as supporting more aggressive fiscal spending and MMT views, while Sato has publicly expressed that a weak yen is beneficial and that the government can issue more bonds, strongly supporting the legacy of Abenomics.
The spending and tax cut proposals championed by the Takaichi government already triggered selling in the yen and government bonds earlier this year, and markets continue to debate the risk of her plans reigniting a bond sell-off. Even former BOJ Governor Haruhiko Kuroda, who presided over extreme monetary easing, has publicly warned that expansionary fiscal policy and tax cuts could push up inflation and raise bond yields.
"Panic selling of stocks and bonds from Tokyo to Wall Street" is not a linear, certain outcome. However, under the combination of "more dovish central bank personnel signals + a more aggressive fiscal expansion narrative + unclear financing constraints," the probability of the Takaichi government triggering severe turbulence in global financial markets is expanding.
If the Takaichi government pushes for larger-scale stimulus based on an "Abenomics-style" logic—such as a two-year suspension of the food tax and expanded industrial investment—while the market perceives its financing arrangements as lacking credible medium-term constraints (especially with the political feasibility of future tax hikes being questioned), then Japan's debt sustainability concerns could intensify rapidly. Against the backdrop of Japan's extremely high debt burden and interest rates already in an upward trajectory, the sensitivity of debt interest payments would rise swiftly. Investors would demand higher term premiums and risk compensation, causing the ultra-long end of the yield curve to experience a "breakout" surge first, which in turn would reinforce worries about fiscal sustainability—creating a self-reinforcing selling feedback loop.