Long-dated Japanese government bond yields have surged again, with the 20- and 40-year maturities hitting fresh cycle highs, Zero Hedge reports.

The spike has pressured risk sentiment and dragged the Nikkei sharply lower, sending the index not only beneath the 50,000 mark but under 49,000—roughly a 7% drop from the record level set on Halloween.

The latest jump in yields comes just as Prime Minister Sanae Takaichi pushes for a new round of fiscal support—an initiative that has collided with a grim Q3 GDP reading, one of the worst since the pandemic.

Japan appears to have slipped back into recession, raising questions about how any new spending package could be financed when the bond market is already showing signs of strain.

Goldman’s Delta-One chief, Rich Privorotsky, notes that the bond market’s limits are becoming increasingly clear: investors may simply not tolerate large-scale deficit spending at this point.

Yet while fiscal stimulus may be squeezed out, Tokyo may have little choice but to ramp up defense spending as its diplomatic clash with Beijing escalates. What began with Takaichi’s recent comments on Taiwan has now ballooned into the most serious Japan-China confrontation since the 2013 Senkaku Islands crisis.

Diplomatic Rift Over Taiwan Remarks

Japan’s embassy in China has issued safety advisories urging its citizens to avoid crowded areas and stay alert, following a wave of hostile commentary on Chinese social media.

The uproar began after Takaichi told lawmakers that a Chinese assault on Taiwan that endangered Japan could prompt a military response. Beijing demanded that she retract the statement, but Tokyo’s leadership made clear that Japan’s official position has not changed.

A senior Japanese official traveled to Beijing on Tuesday in an attempt to cool tensions, but the discussions appeared fruitless.

Liu Jinsong, head of the Chinese Foreign Ministry’s Asia division, publicly expressed dissatisfaction with the meeting’s outcome, calling the atmosphere “solemn.”

Meanwhile, a Chinese diplomat in Tokyo posted a veiled threat directed at Takaichi online, prompting sharp criticism from the Japanese government—even as state-run Chinese outlets continued to attack her rhetoric, accusing her of reviving “militarist demons.”

Backlash Against Japan in China

Japan’s embassy has warned its nationals to act cautiously, avoid traveling alone, and remain alert to their surroundings.

In Japan, tourism—a sector heavily reliant on Chinese visitors—has already taken a hit. Multiple Chinese airlines, including Air China, China Eastern, and China Southern, are offering refunds on flights to Japan through the end of the year.

Beyond tourism and entertainment, Japanese officials are bracing for potential supply-chain fallout. Japan depends heavily on China for critical minerals used in electronics and automobiles. Economic security minister Kimi Onoda warned that relying on a country prone to retaliatory economic measures poses an obvious strategic risk.

China appears to be leveraging the diplomatic standoff to reassert claims over the disputed East China Sea islands.

Over the weekend, Chinese coast guard vessels entered waters surrounding the Senkaku/Diaoyu Islands, prompting Japan’s coast guard to intervene.

Limited Prospects for Diplomatic Relief

With the G20 summit in South Africa approaching, some had hoped for a potential high-level meeting between Chinese and Japanese leaders. But Beijing has said its premier does not plan to meet Takaichi. Japanese officials say no bilateral sessions have been scheduled, though they remain open to dialogue.

According to Cornell University’s Allen Carlson, China views Japan’s refusal to walk back Takaichi’s Taiwan comments as evidence that Tokyo is unwilling to make concessions—complicating any near-term de-escalation.