Japan's benchmark 10-year government bond yield slipped below 2.8% on Friday, Oct. 30, after the Bank of Japan held its policy rate at 1.25%, closing a month that began with long-dated yields at records and ended with buyers returning to the market.

For investors in Asia, the swing matters well beyond Tokyo. Japanese yields set a floor for borrowing costs across the region, and Japanese insurers and pension funds are among the largest holders of foreign bonds. When domestic yields climb, those institutions have more reason to keep money at home, and a calmer JGB market eases that pressure on Treasuries, Australian bonds and Asian credit.

The month opened under strain. The 30-year yield touched a record 4.235% on Oct. 5, according to Reuters, as investors waited for Prime Minister Sanae Takaichi to speak at the start of an extraordinary session of parliament. The 10-year yield stood at 3.08% that morning. By Oct. 30 it had fallen below 2.8%, close to its lowest level in almost three months, data compiled by Trading Economics showed.

Ministry of Finance auctions show steady demand

The Ministry of Finance's October auctions gave the clearest read on who is still willing to lend to Tokyo, and at what price.

On Oct. 6 the ministry accepted 1.97 trillion yen of competitive bids for new 10-year bonds carrying a 3.1% coupon. The yield at the lowest accepted price was 3.103%, and competitive bids totaled 7.4 trillion yen, about 3.8 times the amount accepted, according to the ministry's results.

Two days later the 30-year auction drew 1.75 trillion yen of competitive bids for 450.7 billion yen of bonds, a ratio of about 3.9 times. The new issue carried a 4.2% coupon and sold at an average yield of 4.109%. That compares with a 4.0% coupon and an average yield of 4.079% at the September 30-year sale, where bids ran at roughly 3.8 times the amount accepted. Investors demanded a little more yield in October, but they turned up in similar size.

The strongest result came on Oct. 20. The ministry sold 537.1 billion yen of 20-year bonds at an average yield of 3.723%, and competitive bids reached 3.14 trillion yen, nearly 5.8 times the allotment. The yield at the lowest accepted price, 3.729%, was only 0.6 basis point above the average, a narrow gap that points to little stress among dealers.

October's sales absorbed supply without the wide tails that tend to unsettle dealers. The gap between 10-year and 30-year auction yields, about one percentage point, remains wide by Japanese standards and is consistent with the higher term premium investors are charging on long-dated debt globally.

BOJ hold and Takaichi's fiscal plans

The Bank of Japan's decision on Oct. 30 removed one source of near-term pressure. The board kept the policy rate at 1.25% in an 8-1 vote, with board member Hajime Takata dissenting in favor of a rise to 1.5%, according to the bank's statement. The board judged that underlying inflation is now broadly consistent with its 2% target, a judgment that leaves a move at the December meeting open. Capital Times reported the details of the decision, including the bank's higher inflation forecast.

Price data kept that option alive. A key gauge of services-sector inflation rose 3.7% from a year earlier in September, the fastest pace since June 2024, Trading Economics reported. Earlier in the month, board member Ayano Sato, who had voted against the September rate increase, said she backed raising rates gradually in several steps.

Fiscal policy is the other half of the story. Takaichi has pursued expansionary spending since taking office a year ago, and investors have worried about the effect on Japan's finances. She has pledged to cut the consumption tax on food and said the measure would be paid for without new government bond issuance.

Ahead of her Oct. 5 address, the Nikkei newspaper reported that she would promise to respond quickly to unexpected moves in the economy and markets, and that the government would set the size of annual debt issuance with an eye on interest rates, Reuters reported. Masahito Sugawara, a senior strategist at Daiwa Securities, told Reuters that yields at the time already priced in a change of course, and that they could rise further if the prime minister signaled she would keep her expansionary stance.

Global investors appear to be testing the market again. Trading Economics said on Oct. 29 that global asset managers were returning to Japanese bonds as domestic demand firmed. On Oct. 30, a selloff in technology shares on worries that heavy AI spending may not pay off also sent investors into government bonds, Reuters reported.

What comes next

The calm is conditional. A December rate increase is the main risk to short- and medium-term yields, while the super-long end depends on whether the government keeps issuance in check as it funds the food tax cut and other measures.

The next test is the ministry's November round of 10-year and 30-year sales. A drop in bids from October's levels of about 3.8 to 3.9 times would be the first sign that the late-October rally has run out of buyers.