Japan’s 10-year government bond yield dropped to around 1.12% on Monday, its lowest level in three months, as escalating trade tensions under President Trump stoked fears of a global recession and prompted investors to seek refuge in the safety of government bonds. The sharp decline in bond yields comes amid growing concerns about the economic fallout from the U.S. administration’s aggressive trade policies.
Japan 10-year yield slides on haven bid
Last week, President Trump unveiled unexpectedly high reciprocal tariffs on a range of goods, which provoked retaliatory measures from major trading partners such as China and the European Union. This escalation triggered a sharp selloff in equities and commodities as investors reacted to the potential impact on global growth.
In response to the growing uncertainty, market participants flocked to safer assets such as the Japanese yen, Swiss franc, and government bonds, which are traditionally viewed as safe havens during times of economic instability. The yen’s rise and the lower bond yields reflect investors’ flight to security, as they seek to shield their portfolios from the risk of further market volatility. These movements suggest that, despite Japan’s relatively strong economic fundamentals, global trade tensions are beginning to weigh heavily on investor sentiment, leading to an increase in demand for low-risk assets.
Japan saw accelerated nominal wage growth
Domestically, Japan saw accelerated nominal wage growth in February 2025, offering a glimmer of optimism for the economy. The uptick in wages is seen as a positive sign for domestic consumption, which has been a key driver of Japan’s recovery from the pandemic-induced slowdown. With higher wages, households may have more disposable income to spend, potentially supporting economic growth despite the external headwinds. However, while wage growth is encouraging, Japan’s economy remains under pressure from the broader global trade uncertainties, which could dampen business confidence and investment in the coming months.
In this environment, the Bank of Japan (BOJ) is expected to continue its course of raising interest rates, having already implemented a series of hikes since the end of negative interest rates in 2024. However, the economic outlook remains complicated due to the risks stemming from the escalating trade war. While the BOJ is committed to normalizing monetary policy in the face of improving inflation and growth prospects, the external shocks caused by trade tensions pose a significant risk to Japan’s export-dependent economy. These factors complicate the central bank’s decision-making, as it must carefully navigate between supporting domestic growth and responding to global economic developments.
Outlook is now highly uncertain
The outlook for Japan’s economy is now highly uncertain, with the global trade environment playing a critical role in shaping future growth prospects. Investors are likely to continue watching closely for further signs of escalation in the trade conflict, as well as for any new policy signals from the BOJ that may help mitigate the impact of external disruptions. While Japan’s economic fundamentals, such as wage growth and a stable domestic market, provide a foundation for growth, the ongoing volatility in global markets suggests that caution will remain the prevailing sentiment in the near term.
