Japan Bond Yields Surge to Records as Election Stokes Fiscal Concerns; Stocks and Yen Fall

Reuters

16:48 JST, January 20, 2026

TOKYO, Jan 20 (Reuters) – Japanese government bonds (JGBs) plunged, sending yields to record highs, while Tokyo stocks and the yen also fell after Prime Minister Sanae Takaichi’s calling of a snap election shook confidence in the country’s fiscal health.

Takaichi’s fresh campaign pledge to cut sales taxes on food sent yields on 20-year JGBs JP20YTN=JBTC soaring as much as 19.5 basis points (bps), the steepest one-day move since last April, to an unprecedented 3.45% as demand for the notes slumped at an auction.

The benchmark Nikkei 225 Index .N225 dropped 1.1% to close at 52,991.10, losing 2.5% over the last four days in its longest selloff in two months.

Short- and long-term yields have hit successive all-time highs on concerns that tax cuts, touted by both Takaichi’s ruling Liberal Democratic Party and opposition groups, will impair Japan’s already strained finances.

“It’s all fear of Takaichi’s reflationary policy and particularly on the consumption tax cuts, because she was ambiguous about timing and how she finances it,” said Naka Matsuzawa, chief macro strategist for Nomura Securities. “The bottom line is no one wants to buy or catch the falling knife at this point.”

After more than a week of speculation, Takaichi on Monday made it official in calling for a snap election on February 8. She pledged to suspend the nation’s 8% levy on food for two years, a move that would reduce annual government revenue by about 5 trillion yen ($31.6 billion), according to official data.

The yen, which sank to a 1-1/2-year low against the dollar last week, weakened 0.2% to 158.44.

“It just plays to that view of highly stimulatory fiscal policy, which is driving that backup in JGB yields but to date not providing any support for the Japanese yen,” said Ray Attrill, head of currency strategy at National Australia Bank.

The Ministry of Finance sold about 800 billion yen in 20-year debt on Tuesday. The bid-to-cover ratio at the auction, a measure of demand, fell to 3.19 from 4.1 at the previous sale in December.

Bond prices accelerated declines after the auction, sending yields sharply higher. The benchmark 10-year yield JP10YTN=JBTC touched 2.35%, the highest since February 1999. The yield on the 40-year JGB JP40YTN=JBTC, Japan’s longest tenor, rocketed 26 bps to a record 4.205%.

Investors were already concerned about Japan’s deteriorating finances, and now have to factor in an increase in spending regardless of the election outcome, said Eiichiro Miura, a senior general manager of investments at Nissay Asset Management.

“The market is now lost,” Miura added. “Market players do not know at which level they should buy JGBs.”

With U.S. markets closed for a holiday, Japanese shares also took cues from a slump in European equities after President Donald Trump threatened additional tariffs on eight European countries until the U.S. is allowed to buy Greenland.

The broad Topix index of shares .TOPX slid 0.8% to close at 3,625.60.

In addition to concerns about the scale of Takaichi’s fiscal stimulus, the Bank of Japan’s lifting of its key policy rate in December and signaling of more hikes on the way have also put more upward pressure on short-term yields.

The two-year JGB yield JP2YTN=JBTC, the one most sensitive to BOJ policy rates, rose to 1.225%, the highest in LSEG data going back to 2001, before edging lower to 1.21%.

The BOJ is widely expected to keep rates unchanged at the close of its meeting on Friday. But some central bank policymakers see scope to raise interest rates sooner than markets expect to contend with the weak yen, sources have said.