Are rising Japanese bond yields the next challenge for the Indian stock market?

Japanese government bond (JGB) yields rose to their record highs after Prime Minister Sanae Takaichi secured a landslide victory in Sunday’s snap election to the lower house of parliament, strengthening her mandate to pursue expansionary fiscal policies, including higher government spending and tax relief.

While Takaichi has repeatedly emphasised that her stimulus measures will not destabilise Japan’s public finances, markets remain cautious given that Japan already carries the heaviest debt burden among developed economies.

JGB Yields at Record Highs

Yields on long-dated Japanese bonds rose sharply, reflecting growing investor concerns. The 30-year JGB yield climbed 6.5 basis points (bps) to 3.615%. It had touched a record high of 3.88% last month after Takaichi first proposed suspending the food tax for two years.

Shorter-maturity bonds also saw a sharp rise. The two-year JGB yield increased by 2.5 bps to 1.3%, the highest level since May 1996. The five-year yield rose 4 bps to 1.725%, its highest level since April 2001, according to LSEG data. Meanwhile, the 10-year yield edged up 0.5 bps to 2.28%, and the 20-year yield advanced 1.5 bps to 3.145%.

How Rising Japanese Bond Yields Could Impact Indian Markets

Rising Japanese bond yields could emerge as a fresh headwind for the Indian stock market, which has already been under pressure due to sustained foreign portfolio investor (FPI) outflows. A key risk is the potential acceleration of the unwinding of the yen carry trade across global financial markets.

The yen carry trade is a widely used strategy in which investors borrow at low interest rates in Japan and deploy those funds into higher-yielding assets overseas, including US bonds, emerging market debt and equities. When Japanese interest rates rise, the trade becomes less attractive, prompting investors to unwind positions.

Such unwinding involves selling overseas assets, converting proceeds back into yen, and repaying yen-denominated loans — leading to capital outflows from global markets, particularly emerging economies.

Since the start of 2026, FPIs have net sold Indian equities worth ₹27,833 crore, following net FPI outflows of ₹1.66 lakh crore in 2025. Rising JGB yields could further heighten the risk of foreign capital outflows from emerging markets such as India.

“The rise in long-term Japanese bond yields has become a concern for global financial markets. Prime Minister Sanae Takaichi’s expansionary fiscal stance, at a time when Japan’s debt-to-GDP ratio stands at around 229%, has led to a loss of investor confidence,” said Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited.

He noted that Japan is the largest holder of US Treasuries, with investments of about $1.1 trillion. Rising yields in Japan have already redirected some capital back home, triggering partial unwinding of the yen carry trade. If this process accelerates, he believes it could impact the US dollar and create volatility across global markets.

However, Vijayakumar noted that much of the carry trade unwinding may already be behind the market. “If Japanese inflation remains around 2.1%, severe market disruptions can be avoided. Since this risk is now well recognised, markets are likely to adjust. Major market crises typically arise from sudden and unexpected developments.”

Sunny Agrawal, Head of Fundamental Research at SBI Securities noted that much of the scare on account of the reversal of the Yen carry trade has already played out, as bond yields are in uptrend since Q4CY24 and this development is a well known event for the street.

“On the other hand, persistent rise in Japan’s bond yield can lead to gradual repatriation of funds from the developed market’s bonds and emerging equities, including India. If Japan is fiscally responsible then bond yield can soften and hence the narrative of repatriation will be on back burner,” said Agarwal.

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