Japan’s Yield Surge and Fiscal Stimulus Pose Global Financial Risks

Japan’s government bond market has experienced a sharp reversal in recent weeks, with yields across multiple maturities reaching historic levels. The 10-year JGB yield climbed above 1.77% on October 9, marking a 17-year high as investors grapple with the government’s ambitious fiscal stimulus plans . This surge follows the announcement of a 17 trillion yen ($109 billion) economic stimulus package under Prime Minister Sanae Takaichi, which dwarfs last year’s 13.9 trillion yen supplementary budget and raises concerns about Japan’s already strained fiscal position .

The yield spike reflects growing investor anxiety over the sustainability of Japan’s public finances. With government debt at 250% of GDP and interest payments consuming 23% of annual tax revenue, each 100-basis-point increase in yields adds over 2.8 trillion yen to the government’s annual financing burden . This dynamic has been exacerbated by Takaichi’s shift toward aggressive fiscal expansionism after her recent leadership victory, which has heightened expectations of further stimulus measures to counter a shrinking economy .

The Ministry of Finance’s upcoming 800 billion yen auction of 20-year JGBs will test investor appetite amid these pressures . However, the broader implications extend beyond Japan’s borders. The recent yield surge threatens the $20 trillion yen carry trade, a decades-old strategy where investors borrow in low-yielding yen to fund higher-yielding global investments. As long-term yields climb, borrowing costs in yen rise, potentially triggering a reversal of capital flows and forcing leveraged positions to unwind .

Bank of Japan Governor Kazuo Ueda has signaled a gradual tightening path to align inflation with the 2% target while supporting growth . Yet the central bank’s ability to navigate this balancing act is constrained by the government’s fiscal trajectory. Analysts warn that Takaichi’s stimulus plans could further elevate Japan’s debt-to-GDP ratio, compounding market perceptions of risk . This tension is already priced into bond markets: 40-year JGB yields hit 3.705%, an all-time high, while 10-year yields have risen 70 basis points in the past year .

The ripple effects are particularly pronounced in global markets. A strengthening yen, driven by higher domestic yields, could disrupt export-driven economies and pressure central banks in emerging markets that rely on yen-based liquidity . Additionally, the carry trade breakdown may indirectly impact cryptocurrencies like Bitcoin, which often see capital inflows during periods of global risk-on sentiment but face headwinds as investors prioritize safer assets .

Domestic economic data has further complicated the policy calculus. Machinery orders surged more than expected in September, suggesting robust capital spending , yet the third-quarter GDP contraction—the first since early 2024—has reinforced the case for stimulus . This duality underscores the challenge for policymakers: balancing short-term growth support with long-term fiscal sustainability.

As the yield climb continues, markets will closely monitor the Ministry of Finance’s debt auction results and the Bank of Japan’s response. The interplay between fiscal expansion and monetary tightening will likely dictate not only Japan’s economic trajectory but also the stability of global financial systems reliant on yen liquidity .