Japanese markets hit by triple blows as 'Sell Japan' fear intensifies

Japan's financial markets have come under heavy pressure, suffering simultaneous declines in stocks, bonds and the yen, as concerns mount over the country's worsening fiscal outlook and prolonged monetary easing under the leadership of Japan's new Prime Minister Sanae Takaichi.

Data from last week showed sharp reactions across asset classes. The Nikkei 225 Index fell more than 3 percent, with about $127 billion wiped off the value of Tokyo-listed stocks, according to Bloomberg.

In the bond market, yields continued to surge. The benchmark 10-year Japanese government bond yield breached 1.8 percent — the highest level in nearly 17 years — while the 30-year yield climbed to multi-decade highs. Rising yields reflect growing skepticism about Japan's ability to manage its debt burden amid rising expectations of additional government spending.

The currency market also saw significant volatility. The yen weakened beyond 157 per US dollar, hitting its lowest level since January and edging closer to the 160 threshold — a level that could prompt intervention from the Japanese central bank.

"You must either believe that there's a 'Sell Japan' narrative going on, or you take the view that these relationships are no longer stable," Reuters cited Vishnu Varathan, head of Asia research at Mizuho in Singapore, as saying.

Takaichi's push for aggressive fiscal expansion, coupled with expectations that the Bank of Japan will delay further rate hikes, has fueled fears that the yen will weaken further. A cheaper yen raises import costs, counteracting the government's ongoing efforts to soften the impact of inflation through subsidies.

Japan already carries one of the heaviest debt loads in the world. Government data show that the country's debt burden is projected to reach 248.7 percent of GDP in fiscal year 2025, while interest payments will consume 13.5 percent of annual tax revenue.

"More debt-financed stimulus — which Takaichi hopes will differentiate her from her predecessor — will only make all this worse and is a sign that the highest levels of government don't understand how precarious Japan's debt situation is," said Robin Brooks, a senior fellow at the Brookings Institution.