“Sudden Chaos in Japan’s Bond Market Puts Stock Bulls on Notice” – Bloomberg, Jan 23, 2026  

 

Japan is a unique country. 

 

Entire islands dedicated to art. Beautiful literature. Outstanding cuisine. And, a market where a 243kgs bluefin tuna can fetch up to $3.2 million. 

 

Its also the country I refer to the most when explaining outliers in markets and economics. 

 

Japan had deflation for many years (where the prices of things go down). The equity market (Nikkei 225) took 34 years to recover to its previous highs. Japan’s debt to GDP is ~236%, making it the most indebted developed country in the world. 

 

And this week, that debt market was in chaos.

 

The headline is a perfect example of jargon and inextricably linked markets. 

 

Let’s delve into what happened with the Japanese bond market and why this might not be good for Japan’s equity markets. 

 

Stick around til the ‘And Finally’ section, where we'll talk about lettuces and rogue traders... 

 

Land of the Rising Yields 

Financial markets never cease to keep me on my toes. One of the things I find interesting is the juxtaposition of seemingly small numbers having an outsized impact on huge numbers. 

 

To give you a sense of what I mean: a 0.25% move caused a ~$41 billion wipeout.  

 

But first, a few things to cover. 

 

The size of Japan’s government bond market (JGB = Japanese Government Bond) is $7.2 trillion (USD). That’s made up of lots of different bonds, with different maturities. Meaning, different lengths of borrowing by the government: 10 years, 30 years, 40 years, etc. 

 

On Tuesday this week, the yields on the 30 year and 40 year bonds suddenly widened (increased) by 0.25%, or 25 bps (bps = basis points). 

 

Note we don’t talk about bond moves in terms of the price of the bond, like we would for an equity, instead we talk about it in yield terms. 

 

The yield is the return of the bond. As the price of the bond goes down, the yield increases, and vice versa. 

 

Yield moves are in essence, opposite world. Yields going up means more risk, and more potential reward. It might be an interesting thing to buy the bond if you don’t already own it, but if you do own it, the yield increasing is not good as it means the value of the bond you own has gone down. 

 

Now, 0.25% doesn’t sound big. But in bond world, this is a huge move. 

 

As U.S. Treasury Scott Bessent described it (he was a hedge fund manager for decades prior to serving in office) – this was a “six standard deviation move”. 

 

Here’s an explanation of what that stat means in more detail, but simply put, it means the probability of such an event occurring is about two in a billion (!) 

 

Fiscal Deficit 

Why this big move? Let’s go back 10 years for a moment. 

 

In 2016, a Japanese company issued a public apology. For the first time in 25 years, they were hiking the price of ice cream by 10 Japanese Yen (JPY), or 6 cents in today’s U.S. Dollar terms. This may seem a little strange for those of us living in the US, UK or Europe – prices of food increase all the time, particularly in recent years. 

 

But in Japan, inflation didn’t really exist for 30 years. Prices stayed the same, or even decreased (deflation). 

 

To combat this, the Bank of Japan (BoJ), Japan’s central bank, embarked on a decades long mission to try and get people spending more. They cut interest rates to negative, they put huge amounts of money into the system through quantitative easing (buying government bonds and more to try and stimulate the economy). And they did so on an enormous scale. 

 

The idea is that people would borrow more, spend more, and hopefully spark inflation. 

 

However, it didn’t work. Inflation remained stubbornly low. Japan’s government kept on borrowing more and more, issuing JGBs, resulting in that huge ~236% debt-to-GDP number. 

 

Then, suddenly, everything changed. In 2023, inflation was at more than 4% (double the 2% target the Bank of Japan is trying to achieve). And then, in March 2024, the BoJ increased interest rates for the first time since 2007.  

 

The BoJ also stopped buying as much of the JGBs as it had before (slowing down quantitative easing). 

 

Fast forward to October last year, Japan elected its first female Prime Minister, Sanae Takaichi. In November 2025, she pushed through a $137 billion stimulus package – essentially, a lot of government spending. 

  

Now, she has called a snap election, hoping to win a large majority and, pertinently to this story, has promised to make food cheaper by suspending an 8% sales tax on food if her coalition wins. 

 

So! That was a lot of background to say: Japan’s government is planning to spend a lot more, causing concerns from the market about their fiscal discipline. 

 

By the way, this isn’t a Japan only story. Many governments around the world are in a fiscal deficit – meaning they are spending more than they are taking in from taxes. 

 

Catalysts

I started working at a hedge fund in 2014, but it took until March 2020 for me to truly experience trading through a global market meltdown during the Covid-19 pandemic. 

 

However, I did experience many trading days where everything was fine, until it suddenly wasn’t (like ‘volmageddon’ in 2018) where prices spiralled out of hand, before (most of the time) calming down again.  

 

Benjamin Graham said: “Price is a creature of the market’s mood.” Ultimately, the “market’s mood” can flip, quickly. And that’s what happened on Tuesday in Japan. 

 

One of the catalysts was an auction for JGBs, specifically, for Japanese Government Bonds maturing in 20 years time. 

 

Auctions can tell us how much demand there was for something – lots of demand, prices go up, and vice versa. The demand at this auction was weaker than the 12 month average – investor appetite was pretty weak (because of the fiscal concerns noted above). But on its own, this usually isn’t a catastrophic event. 

 

It’s quite hard to say with precision exactly what caused the sell-off, but one reason why it spiralled so quickly is because the Japanese government bond market can be quite illiquid, meaning there aren’t that many people trading in it. According to this article, and I quote: “It took just $280 million of trading to push Japan’s $7.2 trillion government bond market into meltdown.”

 

Stock Bulls 

In his book, Mastering the Market Cycle, legendary investor Howard Marks lists seven words investors should purge from their vocabularies, one of which is the word “always”.  

  

You might hear someone say: “the stock market always goes back up, just look at the S&P 500 over the past 30 years.” Whilst this has been true for the S&P 500 over that time period (but is not guaranteed to keep displaying that same behaviour in the future) it is not true for every stock market, and most definitely not every stock. 

 

The perfect example of this is Japan’s equity market. 

 

It took from 1989 to 2024 for the Nikkei 225 (one of the two main equity indices) to recover back to its previous highs. In other words, if you’d invested in 1989, you’d have been losing money until 2024. 

 

Over the past couple of years though, equity markets in Japan have been soaring. There’s a bit of a paradox here, because Japanese stocks had rallied (increased) on the hope that the spending the government wants to do would help the earnings of those companies. i.e. equities had been increasing on the exact same thing that bond investors were worried about (too much spending). 

 

The “Stock Bulls on Notice” part of the headline implies that those who had been bullish (positive) on stocks no longer are.  

 

The Takeaway 

There was a lot behind this headline. 

 

The wrap is this: highly unusual movements in the yields of Japanese Government Bonds this week caused chaos, which has now calmed somewhat. The worry about increased fiscal deficit is what is underpinning a lot of the moves, which is also causing those investing into equities to have caution. 

 

As this story continues to unfold, I’m going to have my eyes on the Feb 8th election results, and see if Friday’s Bank of Japan’s interest rate decision (to hold rates, but indicated might increase in future, i.e. a hawkish hold) has any flow through into trading this week. 

 

Today has been slightly longer form than usual. Hit reply and let us know if you liked it, or prefer shorter! 

 

And Finally… Lettuces & Rogue Traders 

In 2022, former UK Prime Minister Liz Truss tried to put through unfunded tax cuts in a so called ‘mini budget’. The value of the British Pound vs. U.S. Dollar (GBPUSD or ‘cable) crashed to the lowest since 1985 at $1.11 (meaning 1 GBP = 1.11 USD), and the yield on 5 year gilts (UK Government Bonds) increased by the most ever in one day (increasing yields = decreasing prices = bad!) 

 

The reason I write this is because whilst researching this Markets Chat, I read this, and I quote: “This is basically the market pricing in a Liz Truss moment in Japan,” – Masahiko Loo, senior fixed-income strategist at State Street Investment Management. 

 

So, why the lettuce reference? In 2022 at the height of the fallout from the mini budget, a British tabloid (The Daily Star) ran a live stream on YouTube, with an iceberg lettuce, betting that the lettuce's shelf life would outlast the Prime Minister. The lettuce did indeed win. 

 

And now, to a rogue trader, Nick Leeson. His story is both cautionary and legendary. Immortalized in the movie “Rogue Trader”, starring Ewan McGregor as Leeson, he’s known as the man who brought down Barings Bank, which was a staid British institution. He hid over $1 billion in losses on unauthorized trades, in an infamous account numbered ‘88888’. A must watch. 

 

Final recommendation before I go: read ‘Ugly Americans: The True Story of the Ivy League Cowboys Who Raided the Asian Markets for Millions’. 

 

Its set in Japan in the 1990s, you'll meet Nick Leeson in it, and as far as I have seen, we still don’t know who precisely it was based on. Let me know if you have the inside scoop!  

 

Until next week!