Crisis or Feast? A Look at the Risks of Japanese Bonds Below 57,000 Points and the New Logic of Global Asset Allocation

Author: Max.S

Just 24 hours ago, Japanese financial history was rewritten. The Nikkei 225 index surged by over 2,700 points, reaching a historic high of 57,000. This was not merely a numerical breakthrough, but a direct pricing of the results of the House of Representatives election with the shortest pre-election period (16 days) since the end of World War II—the ruling coalition of the Liberal Democratic Party (LDP) and the Japan Restoration Party secured an absolute majority of two-thirds of the seats in the House of Representatives.

However, while stock traders were popping champagne, bond trading desks were on high alert. Japanese government bonds (JGBs) were experiencing a massive sell-off, with the yield on 30-year bonds soaring to 3.615%, a tsunami-like event in a country like Japan with its long history of low interest rates.

As financial professionals, we need to look beyond the surface of candlestick charts to decipher the logic behind this "Game of Thrones": the global market is trading a new "Japanese narrative," which, together with the rebound of US tech stocks, the $5,000 mark for gold, and signals of China selling off US Treasury bonds, forms a complex macroeconomic puzzle.

The surge on February 9th was driven by only one core factor: expectations of fiscal expansion brought about by political certainty.

According to the latest vote count, the Liberal Democratic Party (LDP) won 316 seats, and together with the Japan Innovation Party (NIP)'s 36 seats, the ruling coalition holds a dominant position in the 465-seat constituency. This gives the government unprecedented power to pass legislation, including the controversial issue of constitutional amendments, and more importantly—radical fiscal stimulus policies.

The logic behind this transaction is very clear:

• Political endorsement: An absolute majority of seats means that the checks and balances of the opposition (such as the Constitutional Democratic Party) have been reduced to a minimum.
• Policy Expectations: Although Finance Minister Satsuki Katayama explained the "temporary reduction in food sales tax" as "limited to two years and not reliant on bond issuance," the market is clearly pricing in a longer-term fiscal easing.
• Industrial Policy: Defense and industry are at the core of Kaohsiung's policy. This explains why defense-related stocks such as Mitsubishi Heavy Industries led the gains, while SoftBank Group's 8% surge was a direct reaction to the easing of liquidity and the improved investment environment for technology.

For quantitative funds, yesterday's strategy was very simple: go long on the Nikkei, short on the yen, and short on Japanese government bonds. This is a typical "reflation" trading model.

If the stock market is trading on "growth," then the bond market is trading on the prelude to "default risk"—or at least the deterioration of fiscal sustainability.

The sell-off in the JGB (Japanese government bond) market did not come suddenly. As early as January, global macro funds, including Schroders Plc and JPMorgan Asset Management, had already begun reducing their holdings of ultra-long-term Japanese government bonds. Yesterday, the 10-year government bond yield rose 4.5 basis points to 2.28%, and the 30-year yield rose 6.5 basis points to 3.615%.

This sends a dangerous signal: the term premium is making a comeback.

Investors are concerned that the tax cuts, coupled with an already heavy debt burden, will force the Japanese government to increase its issuance of government bonds. Although officials have tried to reassure the market that the tax cuts will not rely on deficit financing, in the liquidity-depleted JGB market, any slight disturbance is amplified.

This presents the Bank of Japan (BOJ) with a significant challenge. Overnight index swap (OIS) data shows that the market is currently pricing in a 75% probability of a BOJ rate hike of 25 basis points at its April meeting, with some traders even betting on a rate hike in March.

Why bet on a March rate hike? Because if the yen depreciates disorderly due to fiscal deterioration (it briefly fell below 157.76 yesterday), the central bank will have to defend the exchange rate by raising interest rates, even if it increases debt servicing costs. This is a classic "fiscal-led" dilemma. Yusuke Matsuo, senior market economist at Mizuho Bank, warned that we need to pay close attention to hawkish comments from central bank board members, which could be verbal intervention to prevent a yen collapse.

The Japanese market is not an isolated case. When we broaden our perspective to the global level, we find that the market movements on February 9th were part of a return to global risk appetite, but also accompanied by deep structural cracks.

• China Market: This was the most intriguing macroeconomic news item yesterday: Chinese regulators advised financial institutions to control their holdings of US Treasury bonds, citing "concentration risk and market volatility." Although the official wording was cautious, emphasizing that this did not involve geopolitics, against the backdrop of tightening global liquidity, this move by the second-largest holder of US Treasury bonds undoubtedly put upward pressure on US Treasury yields (leading to price declines). This is one of the reasons why US Treasury yields rose in tandem with Japanese bond yields yesterday. In effect, this tells the market that the anchor of global sovereign credit is loosening.
• US Markets: The US market rebounded on Friday, led by the semiconductor sector, with Nvidia, AMD, and Broadcom all rising over 7%. This sentiment directly impacted Asia, with semiconductor equipment giants like Tokyo Electron and Advantest driving the Nikkei index higher. The capital expenditure (Capex) story for AI infrastructure construction continues, and while Amazon's massive spending has raised concerns about profit margins, the hardware cycle logic remains valid as long as demand for Nvidia's GPUs persists.
• Precious Metals Market: After experiencing significant volatility, gold prices have climbed back above $5,000 per ounce. This isn't about safe-haven demand; it's about "credit hedging." With Japan pursuing fiscal expansion, the US debt ceiling issue lingering, and China diversifying its reserves, gold has become the only "supranational currency." US Treasury Secretary Scott Bessent's accusation that Chinese traders are influencing gold price fluctuations reveals the US Treasury's anxiety about the dollar's pricing power.

Faced with such a stark market split—stock market euphoria versus bond market crash—how should investors respond?

• Equity Markets: Long Volatility Despite the Nikkei hitting a new high, the VIX index's pullback may just be the calm before the storm. Wednesday's US labor market data and Friday's inflation (CPI) data will be key variables. If US inflation rebounds, coupled with a hawkish shift by the Bank of Japan, global liquidity will face a double tightening.

At this point, it's wise to protect your positions by holding core growth stocks (such as semiconductors and Japanese trading companies) with put options. Current Skew data shows that put options remain expensive, indicating that institutions haven't completely let their guard down.

• Currency Market: The yen's tactical rebound carries a high risk of intervention around the 157 level. Japanese Finance Minister Satsuki Katayama has explicitly stated close contact with the US Treasury Secretary, meaning the possibility of coordinated intervention cannot be ruled out. If the BOJ confirms a rate hike in March or April, the yen may experience a rapid short-covering rally. For carry traders, now is the time to gradually take profits.
• Alternative Assets: Focus on "Hard Assets" In an era of shaky fiat currency credibility (whether due to fiscal concerns about the yen or debt concerns about the dollar), gold, silver, and some cryptocurrencies that have stabilized during this correction (Bitcoin > $70k) possess long-term investment value. Silver, in particular, after a sharp 50% correction, could see its physical inventory tightening trigger a new short squeeze.

February 9, 2026, marked by the Nikkei reaching 57,000 points, was a milestone and a watershed moment. It signified Japan's complete departure from the era of deflation and its entry into a "new normal" characterized by high growth, high inflation, and volatile interest rates. Sanae Takashi's supermajority is a double-edged sword: it can drive up stock prices through aggressive policies, but it can also destroy confidence in the bond market through runaway fiscal deficits.

For financial professionals, the era of a mild "bull market in both stocks and bonds" is over. We need to adapt to extreme scenarios where the negative correlation between stocks and bonds fails, or even where both markets experience a simultaneous decline. In this new era, focusing on the central bank's balance sheet may be more important than focusing on corporate profit statements.

Why bet on a March rate hike? Because if the yen depreciates disorderly due to fiscal deterioration (it briefly fell below 157.76 yesterday), the central bank will have to defend the exchange rate by raising interest rates, even if it increases debt servicing costs. This is a classic "fiscal-led" dilemma. Yusuke Matsuo, senior market economist at Mizuho Bank, warned that we need to pay close attention to hawkish comments from central bank board members, which could be verbal intervention to prevent a yen collapse.

The Japanese market is not an isolated case. When we broaden our perspective to the global level, we find that the market movements on February 9th were part of a return to global risk appetite, but also accompanied by deep structural cracks.

• China Market: This was the most intriguing macroeconomic news item yesterday: Chinese regulators advised financial institutions to control their holdings of US Treasury bonds, citing "concentration risk and market volatility." Although the official wording was cautious, emphasizing that this did not involve geopolitics, against the backdrop of tightening global liquidity, this move by the second-largest holder of US Treasury bonds undoubtedly put upward pressure on US Treasury yields (leading to price declines). This is one of the reasons why US Treasury yields rose in tandem with Japanese bond yields yesterday. In effect, this tells the market that the anchor of global sovereign credit is loosening.
• US Markets: The US market rebounded on Friday, led by the semiconductor sector, with Nvidia, AMD, and Broadcom all rising over 7%. This sentiment directly impacted Asia, with semiconductor equipment giants like Tokyo Electron and Advantest driving the Nikkei index higher. The capital expenditure (Capex) story for AI infrastructure construction continues, and while Amazon's massive spending has raised concerns about profit margins, the hardware cycle logic remains valid as long as demand for Nvidia's GPUs persists.
• Precious Metals Market: After experiencing significant volatility, gold prices have climbed back above $5,000 per ounce. This isn't about safe-haven demand; it's about "credit hedging." With Japan pursuing fiscal expansion, the US debt ceiling issue lingering, and China diversifying its reserves, gold has become the only "supranational currency." US Treasury Secretary Scott Bessent's accusation that Chinese traders are influencing gold price fluctuations reveals the US Treasury's anxiety about the dollar's pricing power.

Faced with such a stark market split—stock market euphoria versus bond market crash—how should investors respond?

• Equity Markets: Long Volatility Despite the Nikkei hitting a new high, the VIX index's pullback may just be the calm before the storm. Wednesday's US labor market data and Friday's inflation (CPI) data will be key variables. If US inflation rebounds, coupled with a hawkish shift by the Bank of Japan, global liquidity will face a double tightening.

At this point, it's wise to protect your positions by holding core growth stocks (such as semiconductors and Japanese trading companies) with put options. Current Skew data shows that put options remain expensive, indicating that institutions haven't completely let their guard down.

• Currency Market: The yen's tactical rebound carries a high risk of intervention around the 157 level. Japanese Finance Minister Satsuki Katayama has explicitly stated close contact with the US Treasury Secretary, meaning the possibility of coordinated intervention cannot be ruled out. If the BOJ confirms a rate hike in March or April, the yen may experience a rapid short-covering rally. For carry traders, now is the time to gradually take profits.
• Alternative Assets: Focus on "Hard Assets" In an era of shaky fiat currency credibility (whether due to fiscal concerns about the yen or debt concerns about the dollar), gold, silver, and some cryptocurrencies that have stabilized during this correction (Bitcoin > $70k) possess long-term investment value. Silver, in particular, after a sharp 50% correction, could see its physical inventory tightening trigger a new short squeeze.

February 9, 2026, marked by the Nikkei reaching 57,000 points, was a milestone and a watershed moment. It signified Japan's complete departure from the era of deflation and its entry into a "new normal" characterized by high growth, high inflation, and volatile interest rates. Sanae Takashi's supermajority is a double-edged sword: it can drive up stock prices through aggressive policies, but it can also destroy confidence in the bond market through runaway fiscal deficits.

For financial professionals, the era of a mild "bull market in both stocks and bonds" is over. We need to adapt to extreme scenarios where the negative correlation between stocks and bonds fails, or even where both markets experience a simultaneous decline. In this new era, focusing on the central bank's balance sheet may be more important than focusing on corporate profit statements.