Japan's 10-year bond yield crosses 3% for first time since 1996, raising global liquidity concerns
Quick Look
Japan's 10-year bond yield crossed 3% for the first time since 1996, with US yields nearing 4.8%, prompting warnings from veteran banker Uday Kotak that central banks may need to expand balance sheets, potentially increasing inflation and short-term rates and triggering volatility in global interest-rate markets, which could pressure Indian markets due to rising global yields and reduced foreign investment appeal.
AI-generated summary
Why It Matters
Japan's 10-year bond yield had remained below 3% for nearly three decades, reflecting prolonged ultra-loose monetary policy. The recent rise, coinciding with increases in US and European yields, signals a potential end to the era of ultra-low rates and growing concerns over inflation and fiscal sustainability.
Japan’s 10-year bond yield crossing 3% and rising US yields are raising concerns over tighter global liquidity, higher inflation and interest rates. Veteran banker Uday Kotak warned that central banks may have to expand their balance sheets, potentially pushing short-term rates higher and making global interest-rate markets more volatile.
Japan’s 10-year bond yield crossed 3% for the first time since 1996, while the US 10-year yield neared 4.8%, as rising government debt and fiscal deficits fuel concerns over higher inflation and interest rates. Veteran banker Uday Kotak warned that central banks may eventually have to expand their balance sheets, potentially pushing inflation and short-term rates higher and triggering greater volatility in global interest-rate markets.
In a post on social media platform X, Kotak said, "As their government debt and deficits go up, central banks may have no option but to expand balance sheets( print money)."
If so, inflation goes up, short end rates go up, he further wrote. "Be ready for a roller coaster ride in interest rate markets"
ALSO READ |Why Japan's 30-year high bond yields should worry Indian stock market investors
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A surge in global bond yields, led by Japan’s 10-year yield touching 3% for the first time since 1996, may keep Indian markets under pressure as investors brace for tighter global liquidity, higher crude prices and fresh inflation risks. For India, the bigger issue is that bond yields are rising together across major markets at a time when crude oil is high, the Middle East conflict is dragging on and the US Federal Reserve is again sounding hawkish on inflation.
Why Japan matters to India
Analysts say Japan has long been one of the world's largest pools of savings. For years, low interest rates at home pushed Japanese money into overseas bonds and other global assets. When Japanese yields rise sharply, that equation may change.
If investors can earn better returns in Japan, even a gradual reduction in Japanese demand can push up global bond yields. Higher global yields then make emerging markets such as India less attractive for foreign investors.
Masahiko Loo, senior fixed income strategist at State Street Investment Management in Tokyo, said the move in Japan is more of a normalisation story than a crisis.
"A 10-year JGB yield at 3% is undoubtedly a milestone, but I would view it more as a normalisation story than a crisis story. Markets are repricing for a higher inflation regime, a higher neutral rate and growing confidence that the BOJ has further to go," Loo said.
"The other underappreciated factor is Japan. The story is not large-scale repatriation, but Japan gradually ceasing to be the marginal buyer of foreign bonds. Less incremental demand from one of the world's largest pools of savings is helping push term premium higher globally. This is why the selloff feels more like a buyers' strike than a sellers' panic," he said.
When Japan, US and Europe yields rise together, global investors demand higher returns to hold risk assets. This can hit foreign flows into Indian equities and bonds, lift domestic bond yields, put pressure on the rupee and hurt valuation multiples in stocks.
What to Watch
AI outlook — possibilities, not facts
Global bond yields will continue to rise in the short term as central banks signal higher-for-longer rates
Likely · Within weeks
Indian equity and bond markets will experience sustained foreign capital outflows if global yields remain elevated
Likely · Within months
Open Questions
- Will the Bank of Japan continue to raise rates or maintain yield curve control?
- How will emerging markets like India respond to sustained capital outflows if global yields remain elevated?
- What is the likelihood of coordinated central bank balance sheet expansion in response to rising debt levels?
