Bessent said the sell-off in Japanese bonds has affected U.S. bonds and has communicated with Japanese counterparts. The Japanese Finance Minister called on the market to calm down.

# Source: Wall Street CN

# By: Li Dan

Janet Yellen attributed part of the U.S. Treasury bond decline on Tuesday to the "spillover effect" of the Japanese bond market, stating that the Japanese bond market had witnessed a "six-standard-deviation" volatility. Japanese Finance Minister Satsuki Katayama said that Japan's dependence on debt issuance is at a 30-year low, its fiscal deficit is the smallest among G7 nations, and the government will consider tax cuts as a financing option.

U.S. Treasury Secretary Janet Yellen indicated that the sell-off in Japanese government bonds has spilled over into the U.S. Treasury market, and she has held talks with her Japanese counterparts. The statement underscores the risk of chain reactions in the global bond market and the impact of fiscal policies of major economies on cross-border capital flows.

On Tuesday, the 20th local time, Japan's bond market experienced what traders described as "the most chaotic trading day in recent years". The yields on Japan's 30-year and 40-year government bonds both soared by more than 25 basis points, marking the largest volatility since the Trump administration announced the so-called "reciprocal tariffs" in April 2025, which jolted global markets.

Yellen ascribed part of the U.S. Treasury price drop on Tuesday to the "spillover effect" from the Japanese bond market. The former decades-long hedge fund manager noted that the Japanese bond market had seen a "six-standard-deviation" swing.

Before the U.S. stock market opened on Tuesday (U.S. Eastern Time), the yield on the 10-year U.S. Treasury note rose about 6 basis points intraday to 4.29%. During the European stock trading session on Tuesday, it once topped 4.31%, hitting the highest level since August 2025.

In an interview with the media on the sidelines of the World Economic Forum in Davos, Switzerland, Yellen said: "I have been in constant communication with the Japanese officials responsible for economic affairs, and I believe they will start making remarks that can calm the market." On the same day, Japanese Finance Minister Satsuki Katayama indeed called on market participants to remain calm.

## Japanese Finance Minister: 30-Year Low Debt Issuance Dependence, Government to Consider Tax Cuts

On Tuesday, during the World Economic Forum in Davos, Japanese Finance Minister Satsuki Katayama told the media: "Since last October, our fiscal policy has been responsible and sustainable, not an expansionary policy, and the data clearly demonstrates this."

Katayama pointed out that Japan's reliance on debt issuance is at a 30-year low, tax revenues are on the rise, and its fiscal deficit is also the smallest among G7 economies. All these facts prove that the government's fiscal policy is responsible and sustainable.

She said: "I hope everyone in the market will stay calm."

Katayama noted that IMF Managing Director Kristalina Georgieva, who met with her last week, gave positive comments on Japan's fiscal situation, stating that the Japanese government pays close attention to fiscal sustainability when taking any actions.

When asked whether she would urge the Bank of Japan to increase bond purchases in its regular operation on Wednesday, Katayama said that if the government were formulating measures to respond to the latest market volatility, she would not be in Davos.

Katayama added that the Japanese government will consider tax reduction measures as a financing option, including cutting unnecessary expenditures and reviewing tax relief policies. She stated that this measure does not require additional bond issuance, which is consistent with the remarks made by Japanese Prime Minister Sanae Takaichi earlier this week.

## Japanese Bond Sell-Off Triggers Market Panic

Analysts believe that the sell-off in Japan's $7.6 trillion bond market started slowly and then seemed to erupt all at once. Although concerns over Japan's fiscal situation have been brewing for weeks, the market suddenly boiled almost without warning on Tuesday afternoon, pushing some bond yields to record highs.

The slump prompted some hedge funds to hastily close losing positions, forced life insurance companies to sell bonds, and caused at least one corporate bond investor to withdraw from a multi-million-dollar transaction. Traders struggled to identify the direct catalyst for the sell-off, but the main concerns were clear: Sanae Takaichi's tax cut and spending increase plans have raised questions about the fiscal health of one of the world's most indebted governments.

Masahiko Loo, senior fixed-income strategist at State Street Investment Management, said: "This is basically the market pricing in a 'Liz Truss moment' for Japan."

The "Truss moment" refers to the former British Prime Minister Liz Truss. In October 2022, her push for unfunded tax cuts triggered a bond sell-off, leading to her resignation after only 40-plus days in office, making her the shortest-serving prime minister in 300 years of British constitutional history.

The market response to Japan's 20-year government bond auction held earlier on Tuesday was lukewarm. Analysts believe this is indeed an ominous sign; it did not make a massive sell-off inevitable, but the weak auction exacerbated concerns about Takaichi's planned tax cuts, market sentiment soured sharply, and selling pressure quickly became self-reinforcing.

Shinji Kunibe, chief portfolio manager of the Global Fixed Income Group at Sumitomo Mitsui DS Asset Management Co., said: "After what initially seemed like a routine 20-year bond auction quickly turned into a crash, everyone was glued to their screens."

## Wall Street Expects Bank of Japan Intervention

Some investors are trying to profit from the panic. Gerald Gan, chief investment officer of Reed Capital Partners in Singapore, said that after witnessing extreme volatility, he began buying Japanese government bonds during the trading session on Tuesday afternoon. He said: "The trading was crazy. A 27-basis-point swing in yields is staggering. The market is so unbalanced that I couldn't help but sell some U.S. Treasury bonds to buy Japanese government bonds."

Vincent Chung, portfolio manager at T. Rowe Price, covered part of his underweight positions during the sell-off. He said: "If you see such unbalanced moves as today, you might consider covering some positions because we don't know exactly when the top will come."

However, in the face of the ongoing sell-off, Wall Street analysts believe that intervention by the Bank of Japan is imminent.

Gareth Berry, strategist at Macquarie Bank in Singapore, said that if the slump intensifies, the Bank of Japan may intervene and buy Japanese government bonds. "If the sell-off continues, especially if it spreads globally, we should see the Bank of Japan reactivate this tool, possibly as early as tomorrow morning's daily operation."

Tadashi Matsukawa, head of fixed-income investments at PineBridge Investments Japan Co., also believes that with Japanese bond yields rising so sharply, calls for the Bank of Japan to conduct emergency operations and for the Ministry of Finance to implement bond buybacks are likely to intensify.

## Fiscal Expansion Plan Sparks Concerns

At the core of this round of market turmoil is the fear of "unfunded fiscal stimulus". Sanae Takaichi is planning to suspend the consumption tax on food and beverages, apparently to consolidate support ahead of the early election next month. This move is expected to cost about 5 trillion yen ($31.6 billion) annually.

Takaichi stated that she will manage the tax suspension without issuing additional government bonds to fill the gap, but investors are not convinced. Some analysts believe that the two-year suspension will become a permanent measure, as raising taxes before the next general election in 2028 is unlikely to be politically feasible.

Rinto Maruyama, foreign exchange and interest rate strategist at SMBC Nikko Securities Inc., pointed out that Takaichi was very aggressive at the press conference and proposed the consumption tax cut plan without a clear funding source. He regards this as a "major shock", and the market currently cannot see how the government plans to finance the proposed tax cuts.

Japan's credit bond market is also feeling the pressure. The average yield on investment-grade corporate bonds jumped on Tuesday, having already risen to a record level the previous day. Reports indicate that at least one credit trader withdrew from a multi-million-dollar transaction on Tuesday, as the trader's client requested the cancellation of the order amid concerns that soaring financing costs could hurt borrowers.

## Yellen Refutes Rumors of European U.S. Treasury Sell-Off

Yellen also sought to downplay the impact of concerns over Trump's tariff threats against European countries over the Greenland issue on Tuesday. Earlier reports suggested that Europe might sell U.S. Treasury bonds as a potential countermeasure to Trump's Greenland plan.

Yellen dismissed such speculation as a "false narrative". She said at a press conference: "This is completely illogical, and I strongly oppose it."

However, Danish pension fund AkademikerPension said on Tuesday that it plans to sell its U.S. Treasury bond holdings by the end of this month, citing concerns that U.S. President Trump's policies have triggered credit risks that cannot be ignored.

Anders Schelde, chief investment officer of the fund, said on Tuesday: "The United States basically does not have a good credit profile, and the U.S. government's finances are unsustainable in the long run." Schelde revealed that the fund, which manages about $25 billion in savings for teachers and scholars, held approximately $100 million in U.S. Treasury bonds as of the end of 2025.

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