Fragile Demand for JGBs

What are JGBs?

JGBs are akin to U.S. Treasuries (USTs) in Japan. They are issued monthly by the Japanese government, which is fully responsible for the payments. Interest is distributed semi-annually while the principal is repaid at maturity. Japan’s Ministry of Finance (MOF) assigns an initial coupon rate according to the JGB’s market value on the day of an auction.[6]

What happened?

On July 23, 2025, the MOF held an auction for its 40-year fixed-rate government bonds (40-Year JGB). The bid-to-cover ratio (bids received / bids accepted) delivered a 14-year low of just 2.127, showing exceptionally weak demand (see Figure 1).[1] Moreover, the MOF assigned a coupon rate of 3.1%, an all-time high shared with the May 28th auction earlier this year (see Figure 2).[1] Despite the same coupon, the stop-out yield surged to 3.375%, marking the highest yield since the inception of the 40-year JGB in 2007 (see Figure 2).[1] The stop-out yield is the highest accepted yield for newly issued JGBs. Since the yield was greater than the coupon rate, the bond sold at a discounted price. This sharp increase in yield signifies a substantive deterioration in investor confidence, as buyers demanded more compensation to commit capital.

Figure 1. Data retrieved from the Ministry of Finance, Japan[1]

Figure 2. Data retrieved from the Ministry of Finance, Japan[1]

Why did this happen?

Several factors contributed to the weak auction—namely, political, monetary, and fiscal. First, just days before the auction, polls showed Prime Minister Ishiba’s coalition failing to grasp a majority in the upper house. Reports of his resignation in the coming weeks also surfaced, though he later denied those reports.[2] This led to fiscal concerns, ultimately lowering the investor appetite for long-dated government debt. 

Second, the BOJ previously maintained a 0% yield on 10-year JGBs through its yield curve control and negative interest rate policies. In spring 2024, the BOJ exited those strategies and raised the uncollateralized overnight call rate, a benchmark for interest rates, which now sits at 0.5%. This follows their projection of CPI inflation to be at 2.5-3.0% for FY2025[7]. On July 22nd, Japan and the US closed a reciprocal tariff reduction from 25% to 15% due on August 7th.[3] The de-escalation further improved Japan’s economic outlook and raised speculation that the BOJ may accelerate rate hikes. The impending upward pressure pushes market yields higher and so discourages long-term bond investments.

Third, Japan runs budget deficits every fiscal year, with the gap having been financed by JGBs. For FY2025, the MOF expects a bond dependency ratio (bond issuance / total expenditure) of 24.9%.[8] As JGB yields rise, the Japanese government faces higher interest costs on new debt issuance, despite already managing a fiscal deficit of 2.3% of GDP and a debt-to-GDP ratio of 251.2% (as of 2024).[8] Future generations may bear a substantial increase in tax burdens owing to the lack of a fiscal buffer. The escalation in debt servicing costs also crowds out public spending and increases the risk of losing market confidence, especially as the BOJ tapers bond purchases. 

What impact does it have on the broader credit market?

The U.S. also faces fiscal pressure, with a projected deficit and debt-to-GDP ratio of 7.6% and 118.6% of GDP in 2025.[8]. Although the debt-to-GDP level is much lower than Japan’s, persistent inflation has forced the Fed to keep rates elevated at 4.25%. U.S. debt-service-ratio (debt service/governmental revenue) is already 18.7%[11,12] as compared to Japan’s 24.5%[8], despite Japan’s higher debt-to-GDP level. Higher debt servicing costs compound fiscal burden and reduce investor confidence, as marked by Moody’s downgrade of U.S. debt in May 2025.[10] 

The U.S. Treasuries have obvious advantages. The U.S. dollar serves as the global reserve currency, which makes U.S. Treasuries the global reserve asset. This grants significant flexibility in issuing debt without market disruptions. Additionally, foreign investors hold a larger share of USTs, 33.0%[9], compared to the 11.9%[8] for JGBs. USTs therefore benefit from more diversified demand, achieving better market resilience and deeper secondary market liquidity. Beyond traditional investors, stablecoins have become major holders of U.S. Treasuries following the GENIUS Act. Tether alone holds $94.5 billion in USTs, contributing to the suppression of short-term yields.[13] Moreover, Japan’s low interest rates have historically positioned the Yen as a funding currency in carry trades, effectively decreasing the value of JGBs. BIS reports[14] show non-bank foreign currency credit, an indicator of carry trade activity in low interest environments, reached ¥65.6 trillion ($445 billion) in Q1 2025. The USD, with comparatively high interest, is less exposed to this dynamic.

Conclusion

While government bonds are regarded as a safe investment, they are ultimately susceptible to the broader uncertainty of public markets. Because government bonds are marked-to-market, a rapidly rising yield can cause massive losses on the bonds’ market value. Even “risk-free” assets are subject to repricing. The 40-year JGB auction made this painfully clear to the Japanese investors. We believe that the JGB situation is worth monitoring because the cheap yield in Japan has historically funded a lot of carry trades. We are interested to see how that will unfold in the upcoming months and whether the dynamic will change. 

While both Japan and the U.S. are experiencing rising fiscal stress, the structural credibility of USTs provides a buffer that is not present in Japan. Nevertheless, even for “risk-free” assets such as JGBs and USTs, it does not take much for the market to lose confidence quickly.

If you would like to learn more about how we think about credit and yield, please feel free to reach out to us at IR@unityinvestments.com. This is Life, Compounded.

References

[1] Ministry of Finance Japan. (n.d.). Past Auction Results of JGBs. Retrieved August 5, 2025, from https://www.mof.go.jp/english/policy/jgbs/auction/past_auction_results/index.html

[2] Bloomberg News. (2025, July 23). Japan’s 40-year bond auction sees weakest demand ratio since 2011. https://www.bloomberg.com/news/articles/2025-07-23/japan-40-year-bond-auction-sees-weakest-demand-ratio-since-2011

[3] The Japan Times. (2025, August 1). U.S. and Japan agree to 15% reciprocal tariff deal. https://www.japantimes.co.jp/business/2025/08/01/economy/reciprocal-15-percent/

[4] Reuters. (2025, July 23). Japan’s Nikkei soars to one-year peak after trade deal; bonds slide. https://www.reuters.com/markets/europe/japans-nikkei-soars-one-year-peak-trade-deal-bonds-slide-2025-07-23/

[5] Yomiuri Shimbun. (2025, August 3). BOJ inflation outlook raises policy shift speculation. https://japannews.yomiuri.co.jp/business/economy/20250803-273405/

[6] Ministry of Finance, Japan. “Guide to Japanese Government Bonds (JGBs)”, by the MOF Debt Management Department. https://www.mof.go.jp/english/policy/jgbs/debt_management/guide.htm

[7] Bank of Japan. “Monetary Policy Meeting – Outlook for Economic Activity and Prices (2025 State of Economy)”. https://www.boj.or.jp/en/mopo/mpmdeci/state_2025/index.htm

[8] Ministry of Finance, Japan. FY 2025 Public Finance Fact Sheet. https://www.mof.go.jp/english/policy/budget/budget/fy2025/02.pdf

[9] U.S. Treasury. Treasury International Capital (TIC) System – Annual Supplement: U.S. International Portfolio Holdings – 2024 (SHL 2024R). https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/shl2024r.pdf

[10] Business Insider. “Bond Yields, Treasuries, U.S. Debt & Safe‑Haven Investing in 2025”. https://www.businessinsider.com/bond-yields-treasurys-us-debt-investing-safe-haven-stocks-kkr-2025-5

[11] Peter G. Peterson Foundation. Monthly Interest Tracker: National Debt Fiscal Data (updated 2025). https://www.pgpf.org/programs-and-projects/fiscal-policy/monthly-interest-tracker-national-debt/

[12] U.S. Treasury, Fiscal Data Division. America’s Finance Guide – Government Revenue and Receipts. https://fiscaldata.treasury.gov/americas-finance-guide/government-revenue/

[13] U.S. Department of the Treasury. (2025). Report of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association, 2nd Quarter 2025 [PDF]. U.S. Department of the Treasury. https://home.treasury.gov/system/files/221/TBACCharge2Q22025.pdf

[14] Bank for International Settlements. (2025). Global Liquidity Indicators – Foreign currency credit denominated in yen. Retrieved from https://www.bis.org/statistics/gli2507.htm

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