Japan's bond vigilantes are sending a warning governments can't ignore, Yardeni says

• Japan's surging sovereign bond yields are a warning for other governments, said veteran analyst Ed Yardeni.
• The government bonds sold off on Prime Minister Sanae Takaichi's proposed fiscal plans.
• Investors worry the move could further strain public finances in the heavily indebted country.

Japan's surging bond yields are sending a signal to other governments, according to veteran market strategist Ed Yardeni.

"Japan's Bond Vigilantes are sending a clear message to governments worldwide about the need for fiscal discipline," Yardeni wrote late on Tuesday, referring to investors who sell bonds in protest of policies they see as harmful to markets.

He said Japan has often served as an early signal for other developed economies on funding conditions and debt dynamics, making the latest moves in its bond market meaningful.

"I think this is a warning to the United States and to other countries that have high debt-to-GDP ratios that there needs to be something done about the wrong direction that these countries are on with regard to their finances," he told CNBC separately on Tuesday.

Yardeni's comments followed a sharp sell-off in Japanese government bonds on Tuesday, when yields on 40-year debt surged to a record high of 4.2%.

The bond rout was prompted by Prime Minister Sanae Takaichi's call for a snap election for February 8 to seek a stronger mandate for her agenda, which includes a proposed two-year suspension of the consumption tax on food.

Investors worry the move could further strain public finances in a country already carrying one of the world's heaviest public debt burdens.

The yields on Japan's long-term 30- and 40-year debt pulled back early on Wednesday after Finance Minister Satsuki Katayama urged investors to remain calm.

Even so, the bond moves have unsettled global markets.

The sell-off in Japan — alongside renewed geopolitical uncertainty, including President Donald Trump's threats to take control of Greenland — weighed on risk sentiment, triggering a sell-off on Wall Street on Tuesday.

Major Asian indexes were mixed on Wednesday. The Nikkei 225 closed 0.4% lower.

The volatility in Japanese government bonds marks a sharp shift for a market that had been dormant for decades.

Since the collapse of the country's asset bubble in the early 1990s, Japanese government bonds were synonymous with ultra-low yields, minimal volatility, and heavy central-bank control, earning a reputation as one of the world's most predictable — and dull — sovereign debt markets.

That began to change in 2024, when the Bank of Japan started normalizing monetary policy after years of ultra-easy settings. The shift lifted the yen, disrupted crowded carry trades, and contributed to a bout of global market volatility during the summer of 2024.