The large and broadly similar movements in global interest rates following the Iran conflict have partly shifted attention away from more structural forces shaping global markets. One such force, often overlooked, is the gradual weakening of Japan’s role as a global anchor for interest rates.
Japan’s current economic path suggests that the long period of stagnation is gradually coming to an end. Demographic developments have led to labour shortages, forcing firms to adopt more dynamic strategies and improved governance. Wage growth has picked up meaningfully in recent years, with annual wage settlements exceeding 5 percent and base salary increases reaching levels not seen in decades. At the same time, monetary policy is gradually normalizing. The Bank of Japan phased out yield curve control between 2022 and 2024, and the policy rate now stands at 0.75 percent, the highest level in 30 years following the hike in December 2025. Other unconventional measures, such as purchases of bonds and ETFs, are also being scaled back.
At the same time, structural challenges remain. Demographics and a public debt level well above 200 percent of GDP raise questions about the long-term sustainability of interest rates. After years of artificially low yields driven by extensive monetary policy measures, higher yields alone may not be sufficient to attract long-term capital. In addition, uncertainty linked to the Iran conflict remains significant. Energy markets, along with Japan’s fiscal and monetary policy, may continue to put upward pressure on yields, even as the growth outlook becomes more uncertain.
These underlying pressures have also been reflected in currency markets. The depreciation of the yen has at times triggered foreign exchange interventions, including in late April, as authorities sought to limit excessive volatility and disorderly market conditions. At the same time, the persistently weak yen has contributed to increased foreign direct investment. For portfolio investment, however, the picture is more nuanced. So far, developments point to a gradual reallocation of capital rather than an abrupt repricing of global risk. The Japanese government bond market is still dominated by domestic investors and the central bank, although the Bank of Japan’s share has declined to below 50 percent. Foreign ownership has increased gradually, from around 10 percent in 2023 to approximately 13 percent at the end of 2025, according to data from the Bank of Japan and the Ministry of Finance. Even so, marginal changes in flows can still influence global bond markets.
Japanese long-term yields, already at multi-year highs, have continued to rise in the wake of the Iran conflict. For dollar-based investors, long-dated Japanese government bonds now offer yields comparable to, or in some cases higher than, US Treasuries when currency risk is hedged. The 30-year Japanese government bond yield averaged around 3.6 percent in April, up from around 3.5 percent in March. This corresponded to a hedged return of approximately 6.6 percent for US-based investors, significantly above the US 30-year yield of around 4.9 percent. Growing foreign participation suggests that this opportunity is increasingly being recognized.
At the same time, a larger foreign presence may amplify market movements as normalization continues. Although direct ownership remains relatively limited, foreign investors account for a much larger share of trading activity. According to data from the Japan Securities Dealers Association, foreign investors represented around 65 percent of monthly cash JGB transactions last year, up from about 12 percent in 2009. This means that relatively small shifts in positioning can generate significant price movements. Increased foreign participation therefore not only adds liquidity, but also raises the risk of faster and less orderly adjustments.
Recent Financial System Reports from the Bank of Japan highlight a related structural shift. The growing presence of foreign hedge funds is not only increasing participation, but also changing the nature of the market. These investors are using repo funding, derivatives and leverage to expand both long and short positions in Japanese government bonds. This raises the risk that position unwinds during periods of stress could reduce market liquidity and amplify volatility, potentially transmitting shocks between global markets and the Japanese bond market.
In a separate analysis, I examine how large movements in Japanese long-term yields relate to the US dollar. The event study covers the period from January 2024 to early February 2026, a phase of monetary policy normalization prior to the Iran conflict. The results indicate that sharp increases in Japanese 10-year yields tend to be followed by a weaker dollar over the subsequent week. At the same time, US real yields do not display any systematic post-event movement, suggesting that the dollar response is not driven by a broad repricing of US risk, but rather by relative pricing and capital reallocation.
Rising long-term yields in Japan reduce the incentive for domestic investors, including banks, insurers and pension funds, to seek higher returns abroad to the same extent as before. Despite this, Japanese investors remain the largest foreign holders of US Treasuries. A currency-hedged investment in a 30-year US Treasury, for example, yielded around 1.9 percent in April. Without currency hedging, the return was approximately 4.9 percent. However, the latter strategy is only profitable as long as the Japanese yen does not appreciate. Changes in Japanese interest rates and the exchange rate can therefore influence global capital flows.
Beyond recent market volatility, a key question is how the underlying structure of global rate formation is evolving. For decades, Japan has acted as a stabilizing anchor for global risk-free rates. Low domestic yields, persistent capital outflows and strong demand for long-duration assets, particularly US Treasuries, helped suppress both global yield levels and term premia. As Japanese yields normalize and the balance between outward and inward capital flows shifts, this dampening effect may gradually weaken.
For investors, this has two important implications. First, the floor for global risk-free rates may be rising, implying that compensation for holding long-duration assets may need to increase. Second, the role of duration as a stabilizing force in portfolios may weaken, particularly in an environment where upward pressure on global yields becomes more persistent.
Overall, the new economic environment suggests that Japanese government bonds are once again becoming an attractive investment option. More importantly, however, the changing role of Japan in global markets may have broader implications for the pricing and stability of long-duration assets worldwide.
// Bul Ekici is an independent economist. She has previously worked at the Riksbank (Sweden’s central bank) for 19 years and has also held roles at, among others, AP3, Länsförsäkringar, HSBC and Skandiabanken.
The large and broadly similar movements in global interest rates following the Iran conflict have partly shifted attention away from more structural forces shaping global markets. One such force, often overlooked, is the gradual weakening of Japan’s role as a global anchor for interest rates. Japan’s current economic path suggests that the long period of stagnation is gradually coming to an end. Demographic developments have led to labour shortages, forcing firms to adopt more dynamic strategies and improved governance. Wage growth has picked up meaningfully in recent years, with annual wage settlements exceeding 5 percent and base salary increases reachingIf you’re new to Tell Media Group, create an account first.
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