Are rising Japanese bond yields the next challenge for the Indian stock market?

The Indian stock market, fresh off a strong performance in 2025 and early 2026, faces a new potential headwind: rising Japanese government bond (JGB) yields. After years of ultra-loose monetary policy, the Bank of Japan (BOJ) has begun to normalize its approach, leading to increased volatility and upward pressure on JGB yields. This shift has implications for global capital flows and could pose challenges for the Indian equity market.

In January 2026, Japan's 10-year government bond yield saw a sharp increase, climbing nearly 17 basis points to close at 2.24% after hitting a three-year high of 2.38% on January 20. On February 9, 2026, the yield rose again to 2.28%. This rise reflects expectations of continued scaling back of the BOJ's bond purchase program and potential changes in fiscal policy following the snap elections. The central bank has kept its key policy rate steady at 0.75%.

Several factors contribute to the rise in Japanese bond yields, including a persistent rise in inflation, the BOJ's monetary policy normalization, expectations of future interest rate hikes, and growing investor concern over Japan's fiscal debt. Years of loose fiscal policy have resulted in Japan having one of the highest public debt ratios among developed economies. Investors are now demanding higher returns for holding long-dated JGBs.

Japan's role as a major creditor nation means that changes in its bond yields can have significant global repercussions. Japanese institutional investors are among the largest holders of foreign bonds, equities, and alternative assets. When JGB yields rise, the relative appeal of overseas holdings declines, potentially triggering repatriation flows.

For India, rising JGB yields can have several implications:

• Tighter Global Liquidity: If Japanese investors repatriate funds, global liquidity could tighten, weighing on risk assets, including Indian equities and bonds.
• Capital Outflows: As the yen carry trade unwinds, foreign investors may trim exposure to higher-yielding markets like India and shift allocations back to Japan or other developed markets.
• Increased Currency Volatility: Rising JGB yields can add to currency volatility, especially if the dollar strengthens as the yen weakens.
• Higher Risk-Free Rates: A jump in JGB yields can push global risk-free rates higher, influencing yield expectations in India and raising long-term borrowing costs.
• Pressure on Growth-Sensitive Equities: Rising yields can trigger pressure on growth-sensitive equities.

Despite these potential headwinds, the Indian stock market has demonstrated resilience. Strong domestic demand, improving credit growth, and a clear policy shift have supported India's recent resurgence. Some analysts expect corporate earnings to see a sharp recovery in 2026, potentially placing India among the fastest-growing markets globally.

To mitigate the risks associated with rising JGB yields, investors in the Indian stock market should adopt a cautious approach. Monitoring global liquidity conditions, keeping an eye on currency movements, and focusing on companies with strong earnings visibility are crucial. While the rise in Japanese bond yields presents a new challenge, India's strong economic fundamentals and policy support provide a buffer against potential adverse effects.