Are Rising Japanese Bond Yields a Threat to Indian Stock Markets?

Japanese Bond Yields Surge After Election Outcome : Japanese government bond yields have climbed to record highs following Prime Minister Sanae Takaichi’s decisive election victory. Markets reacted cautiously as her renewed mandate strengthens expectations of higher government spending and tax relief, raising concerns over Japan’s already stretched public finances.

Long- and Short-Term Yields Hit Multi-Decade Highs : The rise in yields has been broad-based across maturities. The 30-year bond yield moved above 3.6%, while two-year and five-year yields reached levels not seen since the mid-1990s and early 2000s. Even benchmark 10-year and 20-year bonds edged higher, reflecting growing investor unease.

Why Japan’s Fiscal Direction Is Worrying Markets : Although the Japanese government has stressed that stimulus measures will remain fiscally responsible, investors remain cautious. Japan’s debt-to-GDP ratio is among the highest in the developed world, and expectations of prolonged borrowing have weakened confidence in long-term bond stability.

Yen Carry Trade Faces Fresh Unwinding Pressure : Rising bond yields in Japan reduce the attractiveness of the yen carry trade, where investors borrow cheaply in Japan and invest in higher-yielding overseas assets. As returns at home improve, global investors may unwind these positions, triggering selling pressure in foreign markets.

Indian Markets Already Under FPI Stress : Indian equities have already been dealing with sustained foreign portfolio investor selling. Since the start of 2026, FPIs have sold shares worth over Rs.27,800 crore, following net outflows of about Rs.1.66 lakh crore in 2025. Rising Japanese yields could amplify this trend.

Global Spillover Risks from Japan’s Capital Repatriation : Japan is the world’s largest holder of US Treasuries, and higher domestic yields have already started pulling capital back home. A faster unwinding of overseas investments could pressure emerging markets, strengthen currency volatility, and add to global financial market swings.

Is the Risk Already Priced In for India? : Market experts believe that much of the yen carry trade reversal is already known and partly priced in. If Japanese inflation remains stable and fiscal discipline improves, bond yields may soften, limiting further damage. For Indian investors, the risk is real but may unfold gradually rather than as a sudden shock. The above information is based on a Mint report and is for educational purposes only.

Join our WhatsApp Channel to get the latest news, exclusives and videos on WhatsApp