One of the most intriguing developments in global bond markets is the convergence of long-term yields between two fundamentally different economies: Japan and Germany. As of May 2025, both countries have 30-year government bond yields hovering around 3.1%, despite significant differences in monetary policy stances and fiscal health.
Japan, with a policy rate of just 0.50%, continues to maintain one of the most accommodative monetary policies among developed economies. In contrast, the European Central Bank’s policy rate for the eurozone, which includes Germany, stands at 2.25%—more than four times higher.
This disparity in short-term interest rates is even more pronounced when compared to the fiscal metrics of both nations. Japan’s debt-to-GDP ratio exceeds 250%, one of the highest in the developed world. Germany, on the other hand, maintains a relatively conservative fiscal posture with a debt-to-GDP ratio near 62%.
Despite these stark contrasts, investors are pricing in nearly identical returns for holding Japanese and German sovereign debt over a 30-year horizon. As of May 20, 2025, the yield to maturity on Germany’s 30-year bond stands at approximately 3.084%, while Japan’s equivalent bond yields 3.082%.
The path to this convergence has been marked by a notable upward shift in Japanese yields over the past year. In mid-2023, Japan’s 30-year bond yield was just above 1.0%, but it has steadily climbed, breaching the 3.0% mark by May 2025. This steep increase signals a significant repricing of long-term risk and inflation expectations in Japan. In contrast, Germany’s 30-year yield has experienced more volatility but remained within a broader range between 2.3% and 3.1%, gradually trending higher over the same period.
This alignment raises several key questions: Are investors underestimating inflation risks in Japan? Is there an overestimation of long-term disinflationary pressures in Europe? Or perhaps, is the global bond market being driven more by liquidity, technical factors, and global yield convergence rather than by fundamentals like policy rates and fiscal sustainability?
The convergence in yields despite diverging fundamentals underscores a potential structural shift in global bond markets. With central banks gradually exiting ultra-loose monetary policies and inflation expectations normalizing, long-standing yield differentials may be compressing. If that’s the case, traditional assumptions about safe-haven assets and the link between fiscal health and yields may no longer hold as firmly.
Disclaimer:
This article is for informational purposes only and does not constitute financial advice. Always conduct your own research or consult with a financial advisor before making investment decisions.
