Japanese 40-year government bond yield rises 12 basis points to 3.365%

Japanese 40-year government bond yield rises 12 basis points to 3.365%

The yield on Japan's 40-year government bond has surged to 3.365%, marking a significant increase of 12 basis points from the previous level of 3.245%. This rise comes amidst growing concerns about Japan's fiscal health and the potential impact of rising interest rates on the country's debt sustainability.

The recent surge in yields can be attributed to several factors. First, lawmakers' campaign pledges to tackle rising prices have drawn renewed attention to Japan's fiscal situation. Both the ruling and opposition camps have proposed measures to curb the negative impact of cost-push inflation, including cash handouts and a consumption tax cut. However, analysts warn that implementing these steps without credible funding sources could erode trust in Japan's finances and make investors more reluctant to boost their holdings of government debt [1].

Second, the Bank of Japan's tapering of government bond purchases has also contributed to the increase in yields. The central bank has been reducing its purchases, which could relatively amplify the influence of foreign investors and disrupt the debt market's stability. This move has led to an increase in overall trading activity in Japan's bond market, driven by participants from abroad [1].

Moreover, the yield increase is also a reflection of Japan's deteriorating fiscal position. The country's public debt has topped 1,300 trillion yen ($9 trillion), or well over 200 percent of its gross domestic product. Prime Minister Shigeru Ishiba warned in May that Japan's fiscal situation is "undoubtedly extremely bad. It is worse than Greece's" [1].

In the run-up to the House of Councillors election on July 20, many opposition parties have urged the government to reduce or abolish the politically sensitive consumption tax. While the ruling Liberal Democratic Party has ruled out cutting the consumption tax rate, it has promised to provide 20,000 yen in cash handouts. If the ruling bloc loses its majority in the upper house, the consumption tax cut advocated by the opposition could become more likely, potentially adding upward pressure on longer-term interest rates [1].

Meiji Yasuda Life Insurance, one of Japan's leading life insurers, has also indicated that it plans to avoid actively investing in Japanese super-long-term government bonds for the next one to two years due to rising interest rates and supply pressures. Kenichiro Kitamura, Meiji Yasuda's operating officer and general manager of investment planning and research department, predicts that 30-year bond yields could rise to 3.2% to 3.3% by fiscal 2026 [2].

The rise in yields is expected to stay elevated for the foreseeable future, as speculation about additional government bond issuance might linger even after the upper house election. The easing of U.S. tariffs in some major economies is also expected to prompt market participants to take on more risk and sell safe-haven assets [1].

References:
[1] https://english.kyodonews.net/articles/-/56418
[2] https://www.japantimes.co.jp/business/2025/07/08/companies/meiji-yasuda-life-insurance-long-bonds-avoidance/