Nick Goold
For traders of USDJPY and the Nikkei 225, understanding Japanese bond yields—especially the 10-year JGB—helps explain why the market moves the way it does. Bond yields can be easy to understand once you know the basics, and they influence currencies, stock indices, and overall market mood.
In 2025, this connection has become even more important. Japanese yields are rising, the new prime minister is planning more stimulus, government debt worries are growing, and traders are watching how interest rates might change. Understanding bond yields can improve your trading performance.
Understanding Bond Yields: The Basics
A bond is essentially a loan an investor makes to a borrower (such as the Japanese government). The yield is the return the investor receives on that bond. Bond prices and yields always move in opposite directions:
- When bond prices fall, yields rise because investors demand a higher return.
- When bond prices rise, yields fall because investors accept a lower return.
Bond yields mainly move due to interest rate expectations, inflation expectations, government debt levels, and investor demand. When investors worry about a country’s finances or future inflation, they usually require a higher yield to compensate for the risk.
The 10-year Japanese Government Bond (JGB) is the most important benchmark. It reflects the market’s long-term view of Japan’s economic health and acts as a guide for borrowing costs across the economy—for the government, corporations, and homeowners.
What’s Been Happening in Japanese Bond Markets?
Japan’s 10-year JGB yield has been rising sharply in 2025, reaching around 1.8% at the end of November 2025—its highest level since 2008. After decades of near-zero rates, Japan is now entering a new phase where yields move more freely and reflect real economic risks.
Here are the main reasons yields are climbing:
1. New Stimulus Package Under Prime Minister Sanae Takaichi
- Japan's Cabinet has approved a new economic stimulus package worth about ¥21.3 trillion.
- More government spending → more borrowing → more bond issuance.
- When supply increases and fiscal discipline weakens, investors demand higher yields to keep buying Japanese bonds.
2. Massive Government Debt
- Japan has one of the largest government debt levels among advanced economies.
- As debt rises, investors grow more cautious and require higher compensation (yields) to take on risk.
- The combination of rising supply and debt concerns puts steady upward pressure on yields.
3. BOJ Policy Normalization
- The Bank of Japan has ended ultra-easy policies and moved away from Yield Curve Control (YCC).
- Markets now have more freedom to set yields based on real conditions.
- Traders expect the BOJ to continue gradually raising short-term rates.
4. Ongoing Inflation and Long-Term Concerns
- Japan is no longer in deep deflation; inflation is staying above past levels.
- Investors expect slightly higher inflation, continued fiscal spending, and a gradual shift toward more normal interest rates, all of which push the 10-year yield higher.
Why USDJPY Is Rising Even as Japanese Yields Rise
Normally, higher Japanese yields should strengthen the yen by making the carry trade less attractive. But in 2025, the opposite is happening—USDJPY is rising while Japanese yields rise.
1. Rising Yields Are a Risk Signal, Not a Strength Signal
Japan’s government debt is about three times GDP, and the new ¥21.3 trillion stimulus requires even more bond issuance.
Markets see rising yields as a sign of fiscal stress, not healthy tightening.
This creates a “Sell Japan” reaction:
Investors sell JGBs and the yen → USDJPY moves higher.
2. Investors Prefer USD in Uncertain Conditions
Instead of buying yen, global investors choose USD because:
- U.S. markets are more liquid
- U.S. yields remain attractive
- The Fed’s policy outlook is clearer than the BOJ’s
So uncertainty in Japan pushes capital into USD, lifting USDJPY.
3. Fear of a Bond-Market Accident
Rapidly rising JGB yields raise concerns about financial instability in Japan.
This keeps demand strong for USD, not JPY.
In 2025, Japanese yields are rising for negative reasons—debt pressure and fiscal risk. This pushes investors toward USD, not JPY, causing USDJPY to rise even as Japanese yields climb.
Why the Nikkei Is at Risk as Japanese Bond Yields Climb
The Nikkei 225 has risen more than 25% in 2025 and broke above 50,000, supported by strong U.S. stocks, a weak yen boosting exporters, and ongoing corporate governance reforms. But rising long-term Japanese bond yields are creating new risks for the Japanese stock market.
Higher borrowing costs:
- Japanese companies have relied on ultra-low rates for decades.
- As yields rise, borrowing becomes more expensive, profits fall, and valuations come under pressure—hurting the Nikkei.
Rotation into bonds:
- Higher yields make government bonds more attractive.
- As the 10-year JGB becomes competitive with equities, some investors may shift money from stocks to bonds, reducing demand for Nikkei names.
Currency risk still matters:
- A weak yen has supported exporters, but rising yields can create volatility.
- If yields rise too quickly or trigger risk-off sentiment, the Nikkei can fall even if USDJPY remains high.
- And if rising rates eventually cause yen strength, exporter profits would shrink, adding further downside pressure.
The Nikkei’s strong 2025 rally faces increasing headwinds. Rising long-term yields raise borrowing costs, make bonds more appealing, and can disrupt the usual positive link between a weak yen and strong equities. If yields continue climbing, the Nikkei may struggle to maintain its strong momentum.
Trading Strategy: USDJPY
Trend: Still Up
Despite frequent talk about potential BoJ intervention, USDJPY continues to climb.
Why?
- Fear surrounding Japan’s long-term debt
- Rising yields signaling instability rather than economic strength
- A still-strong U.S. dollar
- A cautious BoJ slowly lifting rates but still far behind global peers
1. Trade with the trend until it breaks
USDJPY remains in a strong uptrend. Pullbacks have been shallow and are quickly bought as long as the market stays focused on fiscal risk and yield uncertainty.
2. Watch Japanese long-term yields
If the 10-year JGB yield begins to fall, that is a key signal:
- Fear is easing
- Pressure on the bond market is stabilizing
- Investors may start to buy yen again
In that case, USDJPY could correct sharply—especially with the Fed expected to cut rates and the BoJ slowly raising short-term rates.
3. Identify intervention risk
The Bank of Japan could still act surprisingly at current levels or on a move above 160. However, intervention is usually more effective when fundamentals support yen strength—right now they do not, which means any yen strength may be short-lived unless yields stabilize.
Trading Strategy: Nikkei 225
Current Trend: Up, but fragile
The index is in an uptrend but faces:
- Resistance around 50,000円
- Sensitivity to rising yields
- A risk of rotation from stocks into bonds
1. Trend-following until key levels break
Above the 50,000 level → bullish continuation
Failure below 48,000 / 47,000 → correction likely
2. Watch USDJPY
A sharp drop in USDJPY → signals risk-off → Nikkei tends to fall
3. Watch long-term yields
If yields rise too quickly:
- Borrowing costs increase
- Company profits fall
- Equities lose appeal compared to bonds
This can trigger a larger correction.
4. Potential for a deeper pullback
Given:
- The Nikkei is up 25%+ this year
- Activist investors have already been priced in
- U.S. equities may also correct
The index has room to fall even in an overall bullish environment.
Japanese bond yields now heavily influence both USDJPY and the Nikkei 225, reflecting market concerns about Japan’s debt and policy direction. USDJPY stays supported as rising yields signal caution rather than yen strength, while the Nikkei remains upward but grows more sensitive as higher yields raise financing costs and reduce equity appeal. Watching the 10-year JGB yield and broader risk sentiment helps traders adjust quickly as conditions shift.
