Sanae Takashi's "Dove Nomination" Sparks Term Premium! Japan's Long-Term Government Bond Sell-Off Storm Resurges

According to Tongji Finance APP, after Japan’s new government led by Prime Minister Sanae Takaichi announced on Wednesday the nomination of two new members of the Bank of Japan’s Monetary Policy Committee—both considered to be extremely dovish— the yen exchange rate (USD/JPY) experienced a brief rally in Asian morning trading before quickly turning downward. Meanwhile, the yield on Japan’s 40-year government bonds surged rapidly to the critical 3.6% level, with 10-year and 20-year Japanese long-term bond yields also rising in tandem.

Investors should be alert to the spillover effects from the sudden sell-off of Japan’s long-term bonds during Wednesday’s trading session, which are now spreading to global equity and bond markets. The 10-year U.S. Treasury yield, often regarded as the “anchor” of global asset pricing, is approaching 4.1%. Some seasoned Wall Street analysts even worry that the wave of Japanese bond selling could trigger a collapse in global stock and bond markets, similar to the “Black Monday” crash in early August 2024, with panic-driven sell-offs from Tokyo to Wall Street potentially reemerging.

From the core signal interpreted from the event— the government of Sanae Takaichi, which gained a majority in the House of Representatives, nominated two scholars viewed as dovish/reflationary to replace outgoing BOJ Policy Board members Akiyo Noguchi and Junko Nakagawa— the market’s main takeaway is that the Takaichi cabinet appears more inclined to prioritize growth and fiscal stimulus over rate hikes and fiscal constraints. Consequently, expectations for a “re-tightening” pace of Japan’s monetary policy path have been broadly lowered. The immediate weakening of the yen is not surprising, but more critically, fixed income markets often exhibit a “twist steepening”— accelerated rises in ultra-long Japanese government bond yields— mainly because a more dovish fiscal and monetary policy mix tends to elevate inflation concerns, bond supply worries, and market expectations of increased term premiums.

Statistics show that yields on the 40-year and 30-year ultra-long Japanese government bonds (JGBs) surged more than 10 basis points in the afternoon Asian trading session, with the yen temporarily erasing its previous gains against the dollar.

It is understood that Professor Ayano Sato of Aoyama Gakuin University and Professor Toichiro Asada of Chuo University— two economists closely associated with reflation and Modern Monetary Theory (MMT) fiscal stimulus policies— have been nominated by the Takaichi government to replace the soon-to-depart BOJ Policy Board members Asahi Noguchi and Junko Nakagawa.

Senior fixed income strategist Ryuutaro Kimura from AXA Investment Managers stated, “Both Asada and Sato are well known for their consistent stance on accommodative monetary policy and positive attitude toward expansionary fiscal policies.”

Kimura added, “This choice is completely at odds with previous market assessments of the rate path— most investors believed that appointing at least one hawkish policymaker prioritizing fiscal discipline would curb further depreciation of the yen as a sovereign currency.”

As these new BOJ Policy Board nominations emerge, the yen is again under intense selling pressure following reports that Prime Minister Takaichi last week expressed concerns about further rate hikes during a meeting with BOJ Governor Ueda Kazuo. Although market observers initially expected that the newly elected majority in the House of Representatives would steer her toward a more market-friendly policy stance, her preferred policy direction appears even more dovish than anticipated, potentially complicating the timing of the next BOJ rate hike and accelerating yen depreciation and long-term Japanese bond yields.

Supported by the persistent weakness of the yen, Japan’s key inflation indicators have remained above the BOJ’s 2% long-term target for four consecutive years, signaling the end of Japan’s long deflation era. However, rising prices have become a major economic challenge domestically, with public dissatisfaction over living costs reaching a peak— one of the key reasons behind the Liberal Democratic Party’s significant electoral setbacks before Takaichi took over as party leader last October.

“Japan’s government bond prices are accelerating their decline— meaning yields will rise sharply, with further downside potential in the coming days,” said Ven Ram, macro strategist at Bloomberg Strategists.

“Following the nomination of two well-known economists favoring reflationary policies, the 30-year Japanese government bond yield is leading a broad steepening of the yield curve. Additionally, a report earlier this week indicated that Prime Minister Takaichi pressured BOJ Governor Ueda Kazuo regarding her reluctance to see further rate hikes,” Ram added.

Masamichi Adachi, Chief Economist at UBS Securities Japan, expressed surprise at the nominations, noting that both candidates are staunch reflationists. In the context of yen weakness and inflation-driven discussions of further hikes, this personnel move underscores Takaichi’s strong personal inclination.

Overnight swaps show about a 60% probability of a rate hike by the BOJ by its April monetary policy meeting, with markets fully pricing in a 25 basis point increase by July.

From Tokyo to Wall Street, traders are on edge! Is a major Japanese bond market collapse imminent?

Expectations for BOJ rate hikes have been rising since 2025, compounded by Takaichi’s government preparing to cancel a two-year consumption tax on food and announcing a massive stimulus plan worth hundreds of trillions of yen. This has fueled fears of “term premium” expansion, which has traveled across the Pacific to Japan, sweeping through stocks, bonds, and currency markets. As a result, long-term Japanese bond yields have surged collectively this year, and the yen has continued to depreciate.

The ongoing rate hike cycle, combined with Takaichi’s long-term expansionary fiscal policies, suggests that yields on 10-year and longer Japanese government bonds driven by term premiums could reach new highs until the BOJ signals a pause. Given Japan’s enormous overseas asset holdings, a sharp rise in long-term yields could trigger large-scale sell-offs of U.S. stocks, U.S. Treasuries, and European bonds by Japanese investors to offset losses from plummeting JGBs, or cause massive repatriation of overseas profits into high-yield yen assets, potentially leading to a global crash similar to the “Black Monday” event of August 2024. Investors should remain vigilant.

As previously discussed, the market’s core signal from the Takaichi government’s nominations of two dovish BOJ Policy Committee members is that the cabinet favors prioritizing growth and fiscal stimulus over rate hikes and fiscal discipline. Asada is described as supporting more aggressive fiscal spending and MMT policies, while Sato openly believes a weak yen benefits the government’s ability to issue more bonds and strongly supports Abenomics.

Takaichi’s fiscal and tax-cut proposals, such as a two-year pause on food consumption tax and expanded industrial investments, already triggered yen and bond sell-offs earlier this year. The market continues to debate the risk of further bond sales. Even former BOJ Governor Haruhiko Kuroda, known for his ultra-loose policies, has publicly warned that expansionary fiscal policies and tax cuts could boost inflation and push bond yields higher. The “panic-driven sell-off” from Tokyo to Wall Street is not a linear outcome, but under the combination of “more dovish central bank signals + more aggressive fiscal expansion narratives + unclear financing constraints,” the probability of Takaichi triggering significant global financial market turbulence continues to grow.

If her government pushes for larger stimulus measures— such as a two-year suspension of food consumption tax or expanded industrial investments— and markets perceive her financing plans as lacking credible medium-term constraints (especially given doubts about the political feasibility of tax hikes), then in a context of high debt levels and rising interest rates, debt service costs will quickly become more sensitive. Investors will demand higher term premiums and risk compensation, causing ultra-long yields to “break out” sharply and further reinforce fiscal sustainability concerns—creating a self-reinforcing sell-off cycle.