Like the U.S. bond market, many strategists especially hedge funds have sounded the alarm over Japanese government bonds (JGB) and predicted that yields would rise dramatically in 2012 - leading to a debt crisis.
Fears arise from that fact that Japan's government can still borrow money for 10 years at under 1 percent despite having a public debt more than twice the size of its economy, while it faces negative growth and an aging population. With banks holding a large amount of Japanese bonds, which has become a safe haven amid Europe's debt crisis, a rise in interest rates could hand them large losses.
Kyle Bass, one of the best-known hedge-fund investors, told CNBC in May that Japan would follow Europe with a debt crisis, offering investors the best opportunity to bet against it. He pointed to the Bank of Japan (BOJ) buying trillions of yen worth of bonds, saying there are number of perils associated with the strategy of a central bank trying to print its way out of a debt crisis. But Japanese bonds, in the meantime, continue to firm. In the first week of December, the benchmark 10-year yield hit a nine-and-half-year low of 0.685 percent on expectations of more monetary stimulus from the BOJ, and could go lower after the December 16 elections with the man most likely to be prime minister - Shinzo Abe - pushing for more aggressive easing by the central bank.