Japan’s 10-year government bond yield has pushed toward the 3% mark this year, reaching territory unseen in roughly three decades, and the move is forcing a reassessment of an economy long defined by deflation and near-zero rates, according to GlobalData, a leading intelligence and productivity platform.
From deflation trap to inflation problem
For over 30 years after its 1990s asset bubble collapsed, Japan wrestled with falling prices, hoarded corporate cash, and stagnant wages. The Bank of Japan (BOJ) responded with zero and negative interest rates, mass bond purchases, and yield curve control — yet inflation stayed stubbornly below target for most of that period.
That has now flipped. Inflation has run above the BOJ’s 2% target for an extended stretch, and the central bank has been raising rates rather than suppressing them. The BOJ raised its policy rate to a 31-year high of 1% in June, with Governor Kazuo Ueda stressing that policymakers will continue raising rates as financial conditions remain accommodative. The bank kept rates steady in July but signaled a strong chance of a near-term hike amid the mounting price pressures from the war in the Middle East and a weak yen.
Heading into the September 17-18 meeting, Ueda has hinted that a rate hike is likely, saying officials will decide on policy with upside price risks in mind. US Treasury Secretary Scott Bessent has separately called on Ueda for “decisive” monetary steps to combat the weak yen, strengthening the case for a hike this month, while sources familiar with the BOJ’s thinking say the bank could accelerate its pace of hikes from the current cadence of roughly twice a year, citing pressure from Middle East-driven price risks, strong AI-linked demand, and persistent yen weakness.
Murthy Grandhi, Company Profiles Analyst at GlobalData, comments: “Japan isn’t moving alone. Indian government bonds have been pushed toward 7% yield as US Treasury yields jumped following military escalation between Iran and the US, and yields across the US, France, and Germany have climbed to multi-year highs as well. Three forces are compounding each other: governments issuing more debt to cover pandemic-era and defense spending; central banks stepping back as buyers, leaving private investors to demand fuller compensation; and inflation, reignited partly by oil-price shocks tied to the Iran conflict, eroding the appeal of fixed returns.”
For Japan specifically, the mechanism runs through the yen. A weaker currency raises the cost of imported energy and food, feeding inflation, which is precisely what decades of BOJ policy tried to engineer, only for it to now arrive alongside geopolitical shocks rather than domestic demand recovery. Prime Minister Sanae Takaichi’s fiscal stimulus pledges, including a proposed suspension of the food sales tax, have added a further layer of upward pressure on yields by raising questions about the fiscal trajectory, even as they’ve provided political clarity following her coalition’s supermajority win.
Why carry trade is pressure point
The policy shift threatens the yen carry trade, the practice of borrowing cheaply in yen to fund higher-yielding assets abroad, which has underpinned decades of capital outflow from Japan. As domestic yields rise toward levels last seen before the Lost Decades, investors gain a genuine incentive to keep capital at home rather than chase returns in riskier markets.
If that unwind gathers pace, the consequences extend well beyond Tokyo. Emerging markets that have relied on yen-funded inflows — India among them — could see foreign capital become more selective, pressuring currencies and domestic borrowing costs just as global government bonds already look more competitive against equities and emerging-market debt.
Grandhi concludes: “GlobalData anticipates that Japan’s rising yields are less a standalone story than a symptom of a broader transition away from an era of cheap, centrally supplied capital toward one in which investors again demand real compensation for risk. Whether the BOJ hikes this month or waits, the direction of travel — higher policy rates, a firmer case for holding yen at home, and a potential retreat from decades of capital export — looks increasingly set. For Japan, that may finally mark an exit from the Lost Decades. For everyone else, it’s a reminder that the world’s cheapest source of capital is no longer quite so cheap.”
