For decades, Japan’s government bond market was considered one of the most stable in the world. But in 2025, that reputation is being tested. A wave of global bond selloffs has now reached Japan, alarming investors already on edge due to turmoil in U.S. Treasuries.

Japan’s central bank – the Bank of Japan (BOJ) – long the dominant player in the domestic bond market, has begun scaling back its bond-buying program and reducing its balance sheet. That raises a key question: who’s going to buy Japanese bonds now?

Red flags began appearing on May 20, when a 20-year bond auction saw the weakest demand in over a decade. On May 28, the 40-year bond sale also saw subdued interest, marking the lowest demand in 10 months. The selloff in Japan’s $7.8 trillion government bond market has intensified since U.S. President Donald Trump announced new “Liberation Day” tariffs in April.

Traditionally, government bonds are viewed as one of the safest investments – governments rarely default, and long-term bonds often offer attractive yields for low risk. That’s especially true for Japanese bonds, which were long seen as a haven asset. But demand has started to crumble, causing bond prices to fall and yields to spike.

There are several reasons for the weakening demand. For many years, the BOJ bought up vast quantities of bonds to stimulate the economy during a prolonged period of deflation – Japan’s so-called “Lost Decades.” But now that Japan is emerging from deflation, the central bank is stepping back. In November 2023, BOJ’s bond holdings hit a record high. Since then, it has trimmed about ¥21 trillion ($146 billion) from its balance sheet and has been reducing purchases by ¥400 billion every quarter.

Typically, super-long bonds with solid yields are snapped up by Japanese insurers and institutional investors. But this time, they’re holding back, waiting for the volatility caused by U.S. tariffs and BOJ’s uncertain rate path to subside.

Some foreign investors have stepped in. In April, overseas funds bought a record ¥2.29 trillion of Japanese bonds with maturities over 10 years – following similar records in February and March. This may reflect a growing “Sell America” trend, where confidence in U.S. Treasuries as a safe haven is starting to wane.

Still, the issue isn’t confined to Japan. Bond selloffs have been spreading across global markets since April, driven by uncertainty over tariffs, increased government spending, and economic fallout. In the U.S., a steep decline in bond prices followed Moody’s downgrading the country’s last remaining top credit rating.

Japan, however, faces particularly severe consequences. Rising yields increase borrowing costs for the government, corporations, and consumers. With Japan already burdened by massive national debt, this could be dangerous. Prime Minister Shigeru Ishiba recently said Japan’s financial situation is worse than Greece’s during its crisis.

Insurance companies are also feeling the pain. Four of Japan’s biggest life insurers reported unrealized losses of about $60 billion on their domestic bond portfolios – four times higher than the previous year.

Analysts at Deutsche Bank have warned that higher Japanese yields might make local bonds more attractive to domestic investors, potentially triggering an outflow from U.S. assets. Societe Generale has echoed this, noting that while Japanese capital has traditionally supported U.S. bond and stock markets, this trend may now reverse.

Amid growing instability, market participants are urging the BOJ to act. At recent hearings, major insurers and pension funds called for changes to central bank policy. Meanwhile, Japan’s finance ministry is reportedly considering reducing the issuance of ultra-long-term debt to help balance supply and demand. In an unusual move, the ministry sent out a survey to market participants asking how much issuance would be appropriate – a rare step in Japan’s financial system.

The BOJ is expected to review its bond-buying plans at its June policy meeting. Governor Kazuo Ueda has said the central bank is “closely monitoring” market developments.