The bond vigilantes are sharpening their knives, and this time the target of the fixed income crusaders could be Japan. With a crucial election looming just days away that is set to determine the course of the fiscally troubled nation, a market storm is brewing. As rates hover around record levels for Japanese government bonds, the potential for not only turbulence in yields there but across the globe is gaining investors’ attention. Bond yields move inversely to their prices. “We’ve got an election coming up in Japan where it looks like the upper house may be taken over by those who intend to increase federal spending,” said Joseph Brusuelas, chief economist for tax consultancy RSM US. “It’s an interesting confluence of events that will impact yields across the international economy.” Indeed, Japan is serving as a bit of a global microcosm while it battles issues that are both common to developed nations and unique to a country struggling with pesky inflation, a rising debt load and an unsettled political climate. JP10Y 1Y mountain Japan 10-year bond yield over the past year The situation is even raising the possibility that “bond vigilantes” are on the horizon. The term refers to fixed income buyers who suddenly go on strike when they decide that the reward for a country’s sovereign debt isn’t worth the risk it requires. That such a dilemma could come to Japan was once unthinkable, as the central bank holds more than half the government’s debt and yield-curve control was a staple of monetary policy. However, changing dynamics, including the aforementioned inflation and debt problems along with the uncertainty associated with President Donald Trump’s tariffs , have altered the investing landscape substantially. Veteran investor Ed Yardeni coined the term “bond vigilantes” in the 1980s and sees the specter of similar fixed income trouble on the horizon. In a Yardeni Research note this week, the firm cited as one of several factors spelling trouble for the Japanese bond market “the high odds that the next Japanese government turns to tax cuts and increased spending in ways that trigger the Bond Vigilantes. This pivot could have a typically calm debt market sending turbulence around the globe.” All market eyes will be on Sunday’s election, which will serve as a referendum on Prime Minister Shigeru Ishiba and his coalition government. Japanese long bond yields at the 30- and 40-year maturities have risen nearly one percentage point apiece over the past year, so further turmoil could start to spread if conditions remain unstable. “It’s a preview of coming attractions as the U.S. has to address competing demands for scarce federal dollars which typically result in increased government spending, higher interest rates, higher yields and higher inflation,” said Brusuelas, the RSM economist. “This really is at the heart of the issues across advanced economies.”
