Japan's Fiscal Expansion Risks and Implications for Global Bond Markets

Japan's fiscal expansion is heating up, and investors need to pay attention. , the country is doubling down on stimulus to stave off stagnation. , a move that's sending shockwaves through global bond markets according to Bloomberg.

The Fiscal Tightrope: Aging Population vs. Stimulus Addiction
Japan's fiscal challenges are no secret. The aging population has created a social security deficit that's draining the government's coffers, while a shrinking workforce has left the economy in a prolonged slump according to the IMF. The fiscal deficit has worsened from 2.3% of GDP in 2023 to 2.5% in 2024, and with Takaichi's stimulus plans, it's only going to get worse according to the IMF report. The question isn't whether Japan can afford more spending-it's whether the markets can stomach the fallout.

Long-Duration Bonds: A New Era of Risk
The most immediate red flag is the surge in long-duration Japanese government bond (JGB) yields. , , the highest since October 7, 2025. Goldman Sachs has sounded the alarm, noting that Japan's fiscal risk premium is making a comeback. Investors are pricing in the likelihood of even more aggressive stimulus, which could force the Bank of Japan (BOJ) to normalize interest rates faster than expected according to Bloomberg.

This isn't just a Japan story. The ripple effects are already showing up in global markets. The yen has weakened as capital flows shift to higher-yielding assets, and cross-border investors are recalibrating their portfolios to account for Japan's fiscal risks according to Economic Times. For long-duration bonds in other major economies, the message is clear: if Japan-a country with the world's highest debt-to-GDP ratio-can push yields higher, what does that mean for countries with less fiscal flexibility?

The BOJ's Dilemma: Tighten or Tolerate?
Governor has been walking a tightrope, emphasizing a data-driven approach to monetary policy while keeping the door open for further rate hikes according to FXStreet. But with the government pushing for more stimulus, the BOJ's ability to normalize rates is under pressure. If the central bank is forced to raise rates aggressively to defend its 2% inflation target, it could trigger a bond market selloff that reverberates globally according to FXStreet.

What This Means for Global Investors
For bond investors, the lesson is simple: long-duration bonds are becoming riskier. Japan's fiscal expansion is a case study in how unsustainable spending can erode investor confidence and drive up risk premiums. .

Goldman Sachs warns that Japan's fiscal risk premium could push yields higher even if the government sticks to its budget according to Bloomberg. If Takaichi's administration exceeds expectations with another round of stimulus, the pressure on yields will only intensify. For global investors, this means hedging against capital outflows from Japan and reassessing the appeal of long-duration bonds in other economies.

The Bottom Line
Japan's fiscal expansion is a double-edged sword. While it may provide short-term relief for a struggling economy, the long-term risks to bond markets are undeniable. With long-duration JGBs already trading at multi-decade highs, the question isn't whether yields will rise-it's how fast and how far. Investors who ignore this trend do so at their peril.