Black swan just struck! Japanese government bond interest rate skyrocketed by 34%, and US stocks and Nikkei plummeted across the board.

The Japanese government bond market experienced a Black Swan Event today, with the country's 3-month government bond yield pumping over 34%, corresponding to a big dump in its bond prices. The yield on Japan's 10-year government bond rose by 5 basis points to 1.85%, while the yield on Japan's 2-year government bond reached its highest level since 2008, with all maturities of government bonds experiencing a big pump. At the same time, U.S. stock index futures fell across the board in early trading, and the Nikkei index plunged nearly 2% at one point.

Ueda Kazuo's interest rate hike forecast ignites market panic

The statement by Bank of Japan Governor Kazuo Ueda has become the direct trigger for this Black Swan Event in Japanese government bonds. He stated that he will consider the pros and cons of raising the policy interest rate at the next monetary policy meeting. Confirming the initial momentum of wage negotiations is crucial. Corporate profits are expected to remain high overall. If the economic outlook materializes, there will be a rise in interest rates. The real interest rate is very low. Even if the policy interest rate is raised, the overall environment will still be loose. Increasing interest rates under loose financial conditions does not apply brakes to economic activity.

Ueda Kazuo's assessment of the overseas economy is also worth noting. He stated that the overseas economy shows some signs of weakness, but is gradually growing overall. So far, the concerns about the impact of U.S. tariffs on the global economy have not materialized. Under the influence of tariff policies, the Bank of Japan's view that the overseas economy will temporarily slow down has not changed. The Japanese economy has moderately recovered, although some weak areas are observed.

The core message of this statement is: The Bank of Japan believes that the conditions for raising interest rates are maturing. The momentum of wage negotiations, sustained high corporate profits, and moderate economic recovery are all reasons supporting a rate hike. More importantly, Ueda Kazuo emphasized that “real interest rates are very low,” implying that the current level of interest rates is far below the neutral rate required by the economic fundamentals. Such a statement in the language system of central bank officials is usually a clear indication of a forthcoming interest rate hike.

The reaction in the swap market has validated the market's interpretation of Ueda's statements. Currently, the swap market anticipates that the possibility of the Bank of Japan raising interest rates at the policy decision announcement on December 19 is approximately 62%, and this possibility will rise to nearly 90% by the meeting in January 2026. Just two weeks ago, the market estimated the likelihood of a rate hike in December to be only 30%. This sharp change in expectations indicates that Ueda's statements significantly exceeded market expectations, triggering a violent repricing.

Timeline for Japan's Interest Rate Hike Expectations

Two weeks ago: The market expected the possibility of a rate hike in December to be only 30%.

Current: The possibility of a rate hike in December has soared to 62%, with the probability for the January meeting nearing 90%.

Key Date: December 19 Japan's Central Bank Policy Decision Meeting

Chain Reaction Collapse Effect of Japan's Bond Market

The Japanese government bond market is experiencing a big wave. The country’s 3-month government bond yield has surged over 34%, which is an extremely rare single-day increase. Government bond yields have an inverse relationship with government bond prices; a surge in yields means a big dump in bond prices. The 3-month government bond is a short-term bond, and the drastic fluctuations in its yield indicate a dramatic change in the market's expectations for short-term interest rates.

The 10-year Japanese government bond yield rose by 5 basis points to 1.85%. Although the absolute increase of 5 basis points may seem small, for Japan, which has long been in an ultra-low interest rate or even negative interest rate environment, a 10-year yield of 1.85% is already a high level in many years. More importantly, the 10-year government bond yield serves as the benchmark for the entire bond market, and its rise will drive a chain increase in the yields of government bonds of all maturities.

Japan's 2-year government bond yield has risen to its highest level since 2008. The year 2008 was the year the global financial crisis broke out, and since then Japan has maintained an extremely accommodative monetary policy. The 2-year yield breaking the high point since 2008 marks a historic turning point for Japan's monetary policy, returning from over a decade of ultra-loose policy to normalization.

The phenomenon of all maturities of government bonds experiencing a big pump indicates that this is not a technical fluctuation of a specific maturity, but rather a systematic repricing of the entire yield curve. From 3 months to 10 years, the yields on government bonds of all maturities are rising, showing a fundamental change in market expectations regarding Japan's interest rate outlook. Such a comprehensive repricing is extremely rare in the bond market and usually only occurs when there is a significant shift in central bank policy.

The collapse of the Japanese government bond market cannot be underestimated in its impact on the global financial markets. Japan is one of the largest creditor nations in the world, and its government bond market is large and liquid, always regarded as an important component of global safe-haven assets. When Japanese government bonds plummet, the asset allocation of global investors towards safe-haven assets will be affected, which may trigger a chain reaction of asset reallocation and adjustments in risk appetite.

Nikkei Index big dump and the chain reaction of US stock index futures

The Nikkei index once fell nearly 2%, showing the immediate impact of the Japanese government bond Black Swan Event on the stock market. The inverse relationship between the stock market and the bond market was broken in this incident. Typically, when the bond market falls (Interest Rate rises), the stock market may gain support as funds flow out of the bond market. However, this time, the big dump of Japanese government bonds was accompanied by a big dump in the stock market, indicating that the market as a whole has entered a risk-averse mode.

The decline of the Nikkei index has its intrinsic logic. The sharp rise in interest rate expectations means that the financing costs for Japanese companies will increase, which will compress corporate profits. At the same time, higher interest rates raise the risk-free rate of return, reducing the relative attractiveness of stocks. Furthermore, the yen may appreciate due to interest rate expectations, which will harm the competitiveness of Japanese export companies, and export companies are a crucial component of the Nikkei index.

U.S. stock index futures fell across the board in the early session, indicating that the impact of the Black Swan Event in Japanese bonds is spreading to global markets. The logic behind the decline in U.S. stocks may include: expectations of tightening global liquidity (as Japan begins to raise interest rates from the last bastion of quantitative easing), a decrease in risk appetite leading to a withdrawal of funds from risk assets, and concerns about the global economic outlook (if Japan's rate hike is due to inflationary pressures, it may imply that the global inflation issue has not been resolved).

The Asia-Pacific market has largely softened, indicating that this panic sentiment is spreading within the region. Japan, as one of the largest economies in the Asia-Pacific region, has its monetary policy shift significantly impacting the entire region. Many Asian businesses have operations in Japan or trade with Japanese companies, and the appreciation of the yen along with changes in the Japanese economy will create a ripple effect.

Short-term debt issuance plan intensifies market pressure

In addition, the Japanese Ministry of Finance plans to increase short-term debt issuance to raise funds for Prime Minister Sanna Takichi's economic stimulus plan, with an increase of 300 billion yen (approximately 1.92 billion USD) each for 2-year and 5-year government bonds, and an increase of 6.3 trillion yen in treasury bills. This move is expected to put pressure on short-end Japanese government bonds.

The increase in debt issuance against the backdrop of rising interest rate expectations has produced a dual negative effect. First, the increase in supply itself will depress bond prices (pushing up yields). Second, new bonds issued in a rising interest rate environment will offer higher coupon rates, making existing low-yield bonds relatively unattractive, further depressing their prices.

The issuance scale of 6.3 trillion yen in treasury bills is quite considerable. Treasury bills are short-term government bonds, typically with a maturity of less than 1 year. Such a large-scale issuance of short-term debt will significantly increase supply pressure in the short end market. This also explains why the 3-month government bond yield surged by an astonishing 34%, far exceeding the increase in the 10-year yield.

Economic stimulus plans usually require fiscal expansion, but implementing fiscal expansion in a rising interest rate environment can create policy contradictions. Central banks raise interest rates to control inflation and tighten liquidity, while fiscal stimulus increases liquidity and pushes up inflationary pressures. This policy dissonance may cause confusion in the market regarding Japan's economic outlook, further exacerbating volatility.

Impact Assessment on A-shares and Hong Kong Stocks

So, how big will the impact of the situation in Japan be? Will it affect the A-share market? From the reaction of the US stock market, there is indeed a negative impact. However, from the perspective of the weakening US dollar index, the impact on the A-share and Hong Kong stock markets may not be that significant. The continuous weakening of the US dollar index has led to a surge in non-ferrous metal futures, and the weighted stocks in the A-share and Hong Kong stock markets have also been boosted, significantly rising. In addition, the decline of the US dollar index is also beneficial for strengthening liquidity in emerging markets, and corresponding growth stocks can also benefit.

The Galaxy Securities research report indicates that in December, the A-share market is still in an upward trend, and the short-term market is expected to exhibit a震盪結構特徵. The Hong Kong stock market may be affected by signals released by the Federal Reserve, showing a震盪上行趨勢. First, it is recommended to pay attention to the Central Economic Work Conference in December. The year 2026 marks the start of the “14th Five-Year Plan” period, and it is expected that the conference will focus on deploying economic policies for 2026, with key measures in fiscal and monetary policy, expanding domestic demand, stabilizing the real estate sector, and “anti-involution” among others. Second, the Federal Reserve may adopt a combination of “interest rate cut + hawkish guidance” at its December interest rate meeting.

This relatively optimistic assessment is based on the independence of the Chinese economy and the policy space available. The economic cycles of China and Japan are not completely synchronized, and Japan's interest rate hikes will not directly affect China's monetary policy. Additionally, a weakening dollar index is usually favorable for emerging markets as it reduces the debt burden and capital outflow pressure on these countries.