What Concerns Does Sanae Takaichi’s Victory Bring? Why Were Japanese Government Bonds Sold Off? Will Bond Prices Continue to Fall in 2026?

TradingKey - Recently, long-term Japanese government bonds have faced continuous selling pressure, with prices falling sharply and yields surging to nearly 27-year highs. On January 20, the 10-year Japanese government bond (JGB) yield climbed to 2.330% at one point, hitting its highest level since February 1999; on February 9, following the results of the House of Representatives election, the 10-year JGB yield rose another 5 basis points to 2.28%, while the 20-year yield broke above 3.16%.

This "sell-off wave" sweeping through the Japanese bond market has not only triggered yen volatility—leading to the awkward "twin sell-off" in bonds and the currency—but has also rattled the nerves of global investors. What is causing the sharp decline in JGB prices, and will they peak and retreat or continue to fall in 2026?

What is behind the continuous plunge in Japanese government bonds?

Japanese Government Bonds (JGBs) long labeled as one of the "world's most stable assets," once maintained low volatility for years thanks to strong backing from the Bank of Japan. However, the continuous plunge in early 2026 was no accident; it was the inevitable result of a resonance between fiscal, monetary, and inflationary factors, with the fiscal policy shift led by the Takaichi cabinet serving as the direct fuse.

Currently, Japan's public debt as a percentage of GDP has exceeded 260%, highlighting its fiscal vulnerability. The approach of the 2026 House of Representatives election further intensified the pressure for fiscal expansion.

To win voter support, political parties across Japan have proposed tax cuts. Among them, the Sanae Takaichi-led Liberal Democratic Party (LDP) went as far as promising to "suspend the food consumption tax for two years," reducing the original 8% tax to zero.

It is estimated that if this policy is implemented, it will lead to an annual reduction of 5 trillion yen in government revenue, and the government has yet to clearly disclose specific funding sources to fill this massive gap.

There is widespread market concern that the Japanese government will have to issue more bonds in the future to cover the fiscal deficit, which will directly increase the supply of JGBs, disrupt the existing supply-demand balance, and trigger risk-aversion selling by investors.

For a long time, the Bank of Japan's ultra-loose monetary policy has been the core force supporting JGB prices. Under quantitative easing (QE), the BoJ purchased large amounts of bonds to artificially depress yields and maintain bond market stability.

Against a backdrop of high global inflation, the yen's depreciation has further exacerbated Japan's inflationary pressure, indirectly impacting the bond market. In early 2026, the yen fell to near 156.7 per dollar, showing a clear trend of depreciation.

The weaker yen has led to a significant increase in the cost of imported energy and raw materials, pushing up domestic prices and creating a dual pressure of "imported inflation plus domestic inflation."

Sanae Takaichi's election victory and its direct impact on JGB trends

On February 8, 2026, Japan's House of Representatives election concluded with a landslide victory for the ruling coalition of the Liberal Democratic Party (LDP) and Nippon Ishin no Kai. The LDP alone won 316 seats, and the coalition overall holds over 75% of the seats, achieving total governance. This result completely cleared the political hurdles for Sanae Takaichi to implement her economic policies and has had a direct and profound impact on JGB price trends.

Immediately following the announcement of the election results, the JGB market reacted negatively. The 10-year yield rose by more than 5 basis points to 2.28%, the 20-year yield increased by over 3 basis points to 3.16%, and the yen depreciated further, intensifying the "twin sell-off" in bonds and the currency.

With the Takaichi government securing total governance, Japan is highly likely to continue a policy mix of "fiscal expansion + slow monetary tightening." The Bank of Japan's (BoJ) quantitative tightening (QT) policy will continue, reducing its support for the bond market, leading to insufficient liquidity and further increases in volatility.

Following Takaichi's election win, market expectations for JGBs deteriorated further. Kazuya Fujiwara, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities, stated that unless fiscal policy uncertainty is clearly alleviated, it will be difficult for the market to find positive catalysts to drive buying.

2026 Japanese Government Bond Trend Forecast

Looking ahead to the remainder of 2026, JGBs are unlikely to see a trend-based rebound, and are more likely to exhibit high-level volatility with a downward-drifting price center.

The 10-year JGB yield is expected to fluctuate between 2.10% and 2.60%. If the Ministry of Finance cannot provide a clear debt reduction plan, a breakthrough above 3% is not out of the question.

A significant "bear steepening" is expected, where long-end (30-year, 40-year) yields rise much faster than short-end yields, reflecting market concerns over a long-term fiscal collapse.

The results of the "Shunto" wage negotiations in April-June will be critical. If wage increases exceed expectations for a third consecutive year, the BoJ may be forced to push interest rates above 1.25% in the second half of the year, at which point the bond market would face a second bottom.

Mitsubishi UFJ emphasized that the deterioration of Japan's fiscal condition is a long-term risk. Regardless of changes in inflation and monetary policy, the rise in the fiscal risk premium will continue to suppress JGB prices. At the same time, caution is needed regarding a potential escalation of the "twin sell-off" in bonds and the currency, which could have spillover effects on global financial markets.

Morgan Stanley believes that the pace of the BoJ's interest rate hikes is a key variable. If the pace is faster than expected, JGB prices will fall sharply; if the pace slows, the bond market may gradually stabilize.