Rising Japanese bond yields have triggered global market volatility, raising concerns over carry trade reversals and higher borrowing costs.Japan’s bond market is again on investors’ radar as rising yields spark concerns about the unwinding of the global carry trade and its spillover effects on global financial markets.
On the latest Relative Return episode, AMP chief economist Shane Oliver says Japanese bond yields typically attract little attention from global investors, but recent moves have had outsized market consequences.
“…But there’s this funny thing called the carry trade,” he said
For years, investors borrowed cheaply in Japan and invested in higher-yielding assets abroad, particularly in fixed income markets in Australia, the US and Europe.
That strategy began to face scrutiny as the Bank of Japan lifted interest rates from near zero to around 0.75 per cent, tightening funding conditions for carry trade participants.
Recent political developments intensified investor concerns. Oliver said the announcement of a Japanese election and a proposed temporary cut to food consumption taxes raised fiscal sustainability questions.
“Investors then started to worry… Japan’s got this massive level of debt, massive budget deficit.
“Then that saw long term bond yields rise in Japan, and then a flow-on effect to bond yields around the world.”
The rise in Japanese yields prompted fears that capital could flow back into Japan, reversing the carry trade and pushing up global bond yields, according to Oliver.
“Money that’s come from Japan into our bond market has gone back, goes back to Japan,” Oliver stated, noting that higher yields weighed on equity valuations and added to market volatility.
While the direct impact on Australian households is limited, Oliver warned of potential indirect effects on borrowing costs.
“If you’ve got a higher structure for bond yields globally, and you’re wanting to take [it] at a fixed year loan, fix, say, five year loan, you might end up paying more for it,” he said, citing banks’ reliance on bond markets for longer-term funding.
Corporate borrowers could also face higher funding costs if global yields rise further. However, Oliver stated that variable-rate borrowers are less exposed, as most Australian mortgages are not fixed.
Market conditions stabilised after Japanese officials urged calm, but uncertainty remains.
“Japan’s normally off there in the background. You don’t have to worry about it too much. But obviously this week it started to have some impact in markets,” he added.
Broader currency and asset market dynamics have also been affected by yen moves, according to Natixis IM Solutions portfolio manager Jack Janasiewicz.
“This recent leg lower in USD is a function of the JPY move as the Fed made some calls over the weekend about intervening in USDJPY,” he said.
Janasiewicz added that geopolitical tensions and currency policy concerns could drive investors toward gold and away from US dollar assets.
During the episode, Oliver underscored the fragility of markets amid geopolitical and macroeconomic uncertainty, warning that volatility could persist: “It wouldn’t surprise me at all if we saw another 15 per cent or so correction like we saw last year somewhere along the way.”
