Japanese government bonds are experiencing a historic sell-off, with long-term bond yields soaring to record levels, primarily driven by market panic over Prime Minister Takaichi Sanae's aggressive fiscal expansion plans and the resulting inflation risks. On the 20th, the yield on Japan's 30-year government bond rose by 26.5 basis points to 3.875%; the yield on the 40-year bond climbed 27 basis points to 4.215%, continuing to set new historical highs. The trigger for this sell-off was the government's election-winning pledge to cut the food consumption tax without specifying the funding source, which has sharply escalated market concerns about Japan's fiscal discipline and government spending.

This bond market crash has begun to spill over into stock and foreign exchange markets, placing immense pressure on the Bank of Japan. Analysts suggest that to curb runaway yields, the BOJ may be forced to accelerate the pace of interest rate hikes, or even initiate emergency bond-buying operations immediately to calm the markets. Strategists warn that the current market turmoil resembles the UK's "Truss shock" from years past. They caution that if authorities do not soon provide clear interest rate signals or intervene, volatility could worsen further and potentially spread to global bond markets. A "Truss Moment" Redux? The core of this round of market turbulence lies in the fear of "unfunded fiscal stimulus." Rinto Maruyama, a foreign exchange and rates strategist at SMBC Nikko Securities Inc., pointed out that Takaichi Sanae appeared very aggressive in her press conference and proposed the consumption tax cut without a clear funding plan. He described this as a "major shock," leaving the market unable to discern how the government plans to finance the proposed tax cuts. While Japan's credit default swaps (CDS) have not surged as dramatically as they did during the UK's "Truss shock," yields are still skyrocketing due to the lack of a clear funding source. Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management Co., stated that the bond market was left "confused and surprised" by the announcement, leading to an uncontrollable rise in rates. Shinji Kunibe, a global fixed income portfolio manager at Sumitomo Mitsui DS Asset Management Co., described the market's panic:

"After what seemed like a routine 20-year bond auction quickly turned into a crash, everyone was glued to their screens. This looks like a warning from the market regarding fiscal expansion."

Wall Street Calls for Central Bank "Emergency Rescue" In the face of persistent selling, Wall Street analysts believe intervention by the Bank of Japan is imminent. Gareth Berry, a strategist at Macquarie Bank in Singapore, stated that if the plunge intensifies, the BOJ is likely to intervene and purchase Japanese government bonds. He noted that although Governor Ueda has been reluctant to use this tool, he may soon have no other choice. "If the sell-off continues, especially if it goes global, we should expect the BOJ to dust off this tool, perhaps as soon as tomorrow morning's routine operation." Tadashi Matsukawa, head of fixed-income investment at PineBridge Investments Japan Co., also believes that with rates rising so sharply, calls for the BOJ to conduct emergency operations and for the Ministry of Finance to implement buybacks are likely to intensify. He pointed out that although the issuance volume of super-long-term bonds decreased last year, the supply-demand dynamics have not improved.

Challenges to Monetary Policy Normalization There is a widespread market view that the current fiscal situation makes the Bank of Japan's monetary policy appear excessively loose. Simon Ballard, Chief Economist at First Abu Dhabi Bank, noted that the market is punishing the current policy mix, forcing investors to turn to stocks. He believes that BOJ policy is too loose relative to nominal growth and the fiscal deficit. Ballard emphasized that with inflation at 3%, wage growth at 5%, coupled with Takaichi Sanae's supplementary budget and expectations for an additional fiscal deficit in 2026, the current market pricing (for two rate hikes) is far from sufficient, and that four hikes are actually needed. Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, stated that successive Japanese governments have underestimated the risks of rising interest rates and yen depreciation stemming from expansionary policies. The market is beginning to price this in by raising the neutral rate and term premium, which also explains the lack of buyers in the Japanese government bond market. He warned that expansionary fiscal policy implies a persistent trend of higher yields, and the 40-year Japanese government bond yield could potentially break further above 4% in the coming months.