Japan's 30-Year Government Bond Yield Hits Highest Level in 30 Years... U.S. Treasuries Shaken, Spillover Reaches Korean Stocks [fn Market Watch]

[Financial News] A sharp rise in Japan's long-term government bond yields could rattle South Korea's financial markets after passing through the United States, according to a warning. As Japanese government bonds become more attractive, capital that had been invested overseas could flow back home. That could lead to selling of U.S. Treasuries and, in turn, push up long-term U.S. yields again, creating a chain reaction that pressures Korean bonds and stocks.
According to the financial investment industry on the 20th, Japan's 10-year government bond yield hit 2.96% on the 18th, the highest level in 30 years. The 30-year yield also climbed to 4.155%, marking a 19-year high. Compared with the end of last year, the 10-year and 30-year yields have surged by about 62 basis points and 54 basis points, respectively, with 1 basis point equal to 0.01 percentage point.
Long-term U.S. yields are also swinging sharply. The yield on the 30-year U.S. government bond briefly rose above 5.3% during trading, reaching its highest level since just before the 2007 global financial crisis.
The problem is that the simultaneous rise in long-term yields in the United States and Japan is strengthening what market participants call yield synchronization. There are growing concerns that higher Japanese yields could trigger capital repatriation by Japanese investors, which would push U.S. government bond yields even higher.
Park Sang-hyun, a researcher at iM Securities, said, "The background to the recent strengthening of yield synchronization between the United States and Japan is concern over changes in Japanese capital flows." He added, "Rising U.S. government bond yields, a sharp increase in Japanese government bond yields and higher hedging costs caused by the weak yen have increased the likelihood that funds from Japanese life insurers and pension funds invested overseas will return to Japan."
In fact, Japan's holdings of U.S. government bonds fell for a second consecutive month. Unrealized losses on Japanese government bonds held by Japanese life insurers stood at about 30.9 trillion yen at the end of June, up 60% from a year earlier.
Park explained, "Given the deterioration in investment performance at Japanese life insurers, they are more likely to reduce their allocation to overseas bond investments, including U.S. government bonds." He added, "If capital repatriation by Japanese investors becomes a reality, it could create additional supply-demand pressure in the U.S. government bond market."
Capital repatriation simply means bringing money invested overseas back to the home country.
It is also difficult to rule out the possibility that the yield shock originating in Japan could spread to South Korea's financial markets via the United States. If Japanese investors reduce their exposure to U.S. government bonds, it could drive long-term U.S. yields even higher, which in turn may push up Korean Treasury Bond yields. Higher Treasury Bond yields would also likely raise funding costs for companies, including through corporate bonds.
The stock market would also feel the pressure. Higher long-term U.S. yields raise the discount rate applied to future corporate earnings, which lowers equity valuations. In particular, correction pressure could intensify in growth stocks such as semiconductors and AI. If Japanese institutional investors broadly reduce their overseas asset allocations, it could also weigh on foreign investor flows into Korean stocks and bonds.
Park said, "The U.S. fiscal deficit could widen further due to rising interest expenses and higher defense spending, the risk of a prolonged war with Iran, uncertainty over the Fed's interest rate policy and large-scale corporate bond issuance by hyperscalers. All of these could add upward pressure on U.S. government bond yields."
If Japanese government bond yields rise further, there is also a possibility of a yield shock similar to the one seen in the United Kingdom in 2022, known as the Truss shock. At the time, concerns over fiscal soundness emerged after then-Prime Minister Liz Truss unveiled a large tax-cut plan, sending British government bond yields sharply higher and shaking financial markets broadly.
Park noted, "The likelihood is growing that further increases in Japanese government bond yields could trigger a 'second Truss shock,' similar to the yield turmoil caused by Prime Minister Liz Truss in 2022." He added, "If U.S. and Japanese government bond yields surge further, it could amplify funding risks for hyperscalers and hurt not only the government bond market but also asset markets more broadly."
He also said, "At this point, there is no immediate factor that could stabilize U.S. and Japanese government bond yields lower, other than a resolution of the Iran issue and the resulting plunge in oil prices." He added, "The direction of U.S. and Japanese government bond yields, especially Japanese yields, has become more important than ever for asset markets."
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