Japan Bond Yields Surge as Fiscal Stimulus Fears Intensify

Japanese government bond yields have reached multi-decade highs amid mounting concerns over a potential fiscal stimulus package that could exacerbate the country’s already strained public finances. The 10-year JGB yield climbed to 1.765% on Wednesday, the highest level since June 2008, while the 40-year yield hit an all-time record of 3.705% . These movements reflect investor anxiety over Prime Minister Sanae Takaichi’s administration, which has signaled aggressive spending plans to counter a recent economic contraction .

The catalyst for the yield surge stems from Takaichi’s leadership of Japan’s ruling Liberal Democratic Party, a position she secured in a leadership election last month. As a known fiscal expansionist, Takaichi has pledged to prioritize economic growth through increased government spending. Initial estimates suggested a supplementary budget of ¥14 trillion ($109 billion), but subsequent signals from her party’s internal panels pushed the projected size to ¥25 trillion ($161 billion) . This expansion has alarmed markets, with analysts warning that such a package could further elevate Japan’s debt-to-GDP ratio, already one of the highest among advanced economies .

The economic rationale for the stimulus is underscored by recent data showing Japan’s economy contracted in the third quarter—the first decline since early 2024 . This contraction has intensified pressure on Takaichi to deliver on her campaign promises of supporting households amid rising inflation. However, the scale of the proposed spending has raised questions about sustainability. “Takaichi’s bold expansionary fiscal plans are likely to swell Japan’s debt-to-GDP ratio even higher,” noted Fawad Razaqzada of FOREX.com, highlighting the market’s perception of heightened fiscal risk .

Investor skepticism was further evidenced by the tepid demand for Japan’s recent 20-year bond auction. The bid-to-cover ratio fell to 3.28, below the 12-month average of 3.3, signaling reduced appetite for sovereign debt . Ryutaro Kimura of AXA Investment Managers described the auction as “far from strong,” with weak demand reinforcing expectations of higher yields ahead of the next 40-year bond sale . This cautious stance reflects broader concerns about Japan’s ability to fund its fiscal ambitions without triggering a debt crisis.

The market’s reaction has also complicated the Bank of Japan’s monetary policy calculus. With rates held at 0.5% since January, the central bank faces a dilemma: maintaining accommodative policy risks inflating asset bubbles, while tightening could exacerbate fiscal strains . Traders in Tokyo have increasingly described Japan’s macroeconomic outlook as “messier,” with Stephen Spratt of Société Générale noting that shifting signals from Takaichi’s agenda have deepened uncertainty .

International investors are particularly wary of the yen’s weakness, which has prompted speculation about potential intervention. Meanwhile, geopolitical tensions with China over Takaichi’s remarks on Taiwan have added to market volatility . Goldman Sachs has warned of a return of a fiscal risk premium in Japan’s bond market, with longer-maturity debt and the yen facing renewed pressure as investors reassess the risks of a larger-than-expected stimulus package .