Japan's 20-Year Bond Yields Hit 2.655% High Since 1999 Amid Fiscal Concerns

Japan's super long-term government bond yields have surged to multi-decade highs, driven by persistent market concerns over fiscal expansion and weakening demand from major investors. On Thursday, the yield on 20-year bonds reached 2.655%, the highest level since 1999. This increase reflects a significant shift in the supply-demand dynamics of super long-term bonds, with the yield on 30-year bonds also hitting a historical high last month. The market's apprehension about the government's fiscal policies, coupled with reduced investment appetite, has led to this upward trend in yields. The situation underscores the delicate balance between fiscal stimulus and economic stability, as Japan navigates through a period of heightened financial uncertainty.

This volatility in the bond market is largely attributed to the anticipated increase in bond issuance following the ruling coalition's defeat in the July upper house elections. The government is expected to ramp up borrowing to fund fiscal stimulus measures, which could exacerbate the already strained long-term bond market. Additionally, persistent inflation concerns are adding pressure on super long-term bonds, potentially forcing the Bank of Japan to consider further interest rate hikes.

Investor demand for Japanese government bonds has also been waning. Data from the Japan Securities Dealers Association shows that net purchases of bonds with maturities over 10 years by foreign investors dropped to 48 billion yen (approximately 330 million USD) in July, a significant decline from the previous month. This trend indicates that overseas investors, who had been aggressive buyers earlier in the year, are now pulling back. This shift in foreign investment behavior is a critical factor contributing to the recent surge in bond yields.

Analysts have expressed concerns about the potential impact of reduced foreign investment on the yield curve. The diminishing appetite for super long-term bonds from overseas investors could lead to increased volatility in the long end of the yield curve. This situation is further complicated by the expectation of an interest rate hike in October, which is seen as almost certain by some market participants. The anticipation of tighter monetary policy is likely to persist until the return of the Governor of the Bank of Japan.