Japan's return stirs volatility

Japan’s economy is returning to something resembling normality for the first time in decades.

- Jamie McGeever

That's likely to mean more volatility ahead for the yen and other Japanese assets, as investors try to make sense of this new reality.

While Japanese equities are rising to levels never seen before, that is less remarkable because many other countries' stock markets are also hitting new all-time peaks.

The more intriguing market moves in Japan are happening in government bonds (JGBs) and the yen.

Bond yields across the JGB curve are at multi-decade or record highs, marking a stark disconnect from other major debt markets like the U.S., where Treasury yields have been fairly stable in recent months.

The yen, which was the worst-performing major currency against the dollar last year, has weakened even more to kick off 2026.

On Wednesday, it fell to an 18-month low around 160 per dollar, territory that has previously prompted waves of yen-buying intervention from the Ministry of Finance.

There appears to be a disconnect here. Central bank interest rate hikes and rising bond yields should support the currency, right?

That logic doesn't always hold, however, especially when Japan's unique debt dynamics and inflation history are taken into consideration.

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