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Japanese bond markets are grappling with rising yields amid inflation concerns, potential currency intervention, and a new prime minister’s fiscal stimulus plans, while investors push the Nikkei to record highs.

What caught our eyes this week

Japanese yields are in crisis (or maybe just normalizing)

The real action in rates markets has been overseas lately, with Japanese bond yields rising dramatically (although to not-so-dramatic levels). After decades of deflation, bond markets are struggling to price a revival of inflationary pressures. The Bank of Japan (BOJ) has been in a slow and cautious rate-hiking cycle, committing to its 2% inflation target while also being mindful of sluggish economic growth (negative in Q3 and expected to be barely positive in Q4). Inflation notwithstanding, newly elected Prime Minister Sanae Takaichi wants to press the fiscal gas pedal to accelerate her economy, even calling a snap election in hopes of expanding her party’s legislative majority to pursue her fiscal agenda. At the same time, it appears that weakness in the yen is hitting its tolerable limits and contributing to inflation pressures through higher prices for imports like food and energy. Rumors are swirling of coordinated intervention by both the BOJ and the New York Fed. Meanwhile, equity investors love what they see, with corporate governance reforms, fiscal stimulus, and inflation all acting as a tailwind for earnings and sending the Nikkei index to all-time highs.

CHART OF THE WEEK: Cerity Partners, FactSet, 1/23/2026.

Past performance does not guarantee future results.

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