Japan is said to be nearing a global “danger zone” for bonds as plans for extra Japanese government bond (JGB) issuance progress. The issuance would be used to fund further public spending.
The Strait of Hormuz blockade is described as the main market factor because there is no clear end in sight. Global oil inventory buffers are said to be shrinking, and crude oil prices are edging higher, affecting global bond and equity markets.
Supplementary Budget And Commodity Price Shock
Prime Minister Sanae Takaichi has asked the finance ministry to prepare a supplementary budget. The aim is to support the economy against higher commodity prices linked to the Iran war.
More JGB issuance is expected to help fund the additional measures. This comes alongside concerns about how rising energy costs may affect financial markets.
USD/JPY is expected to remain under 160.00 due to the risk of currency intervention. The article states it was produced using an AI tool and reviewed by an editor.
Looking back at the concerns from 2025, the situation with the yen has only become more critical. With USD/JPY currently trading around 162.50, we have breached the 160.00 level that was seen as a line in the sand. We should therefore consider selling out-of-the-money call options on USD/JPY, positioning for a currency that has limited room to run higher before officials are forced to act.
Policy Response And Market Positioning
The threat of intervention is not theoretical; we saw it happen in 2022 and again in 2024 when the Ministry of Finance spent over ¥9 trillion to support the currency. This history suggests a very low tolerance for rapid yen depreciation, especially with import costs still high. Any sharp moves toward 165.00 would likely trigger a strong official response, making short-yen positions extremely risky from here.
The fiscal situation that worried us last year has also deteriorated, with the 10-year JGB yield now sitting at 1.4%, well above the levels seen in 2025. The supplementary budgets passed to handle the commodity price shock have added to the supply of government debt. This suggests we should look at buying put options on JGB futures, which is a bet that bond prices will fall further as yields continue to climb.
This pressure on bonds is amplified by Japan’s fiscal realities, with a debt-to-GDP ratio that has remained above 260%. More issuance to fund spending just adds to an already enormous pile of debt, making international investors nervous. This fundamental weakness supports a view that Japanese bond yields have more room to rise, regardless of central bank policy.
Finally, the impact of the Strait of Hormuz blockade from last year is still being felt, with Brent crude holding stubbornly above $95 a barrel. As a major energy importer, this continues to squeeze Japanese corporate profits and weigh on the economic outlook. Consequently, we could consider purchasing put options on the Nikkei 225 index as a hedge against sustained high energy prices damaging the stock market.
