Japan faces rising bond yields amid threat of fiscal instability

Japanese government bond yields have reached multi-year highs amid the upcoming elections to the upper house of the Japanese parliament. The 10-year yield exceeded 1.599%, the highest since 2008. In parallel, 30-year bond yields set a record at 3.21%, while 20-year yields reached their highest levels since 1999.

Analysts attribute the rise in rates on the government debt market to growing expectations of large-scale fiscal incentives. Discussions of a possible consumption tax cut in the run-up to the vote have reinforced investors ' concerns about widening budget deficits. Political uncertainty has triggered volatility in the debt segment.

Prime Minister Shigeru Ishiba said that he will not allow the financing of tax breaks by increasing the national debt. However, the opposition forces are actively promoting the idea of increasing spending and tax cuts, which contradicts the task of fiscal consolidation.

Japan is already among the countries with the highest level of public debt in relation to GDP. Tax revenues are insufficient to cover government spending, making the country vulnerable to any fluctuations in the debt market. According to market strategists, any new populist measures may increase the pressure on sovereign securities and lead to a further increase in yields.

An additional pressure factor is the actions of the Bank of Japan. Despite the continuing level of inflation, the regulator left the key rate at 0.5% in June, but confirmed its intention to reduce the volume of monthly purchases of government bonds to 3 trillion yen by March 2026, which may limit liquidity in the market in the long term.

In parallel, there is a structural imbalance of supply and demand. Major institutional investors, including insurance companies, are losing their ability to absorb new volumes of debt securities. This increases the market's sensitivity to macroeconomic and political signals.

Некоторые аналитики предупреждают: если в ближайшее время правительство не представит ясную и сбалансированную бюджетную стратегию, “облигационные мстители” — инвесторы, активно сокращающие позиции в JGB — могут спровоцировать системное давление на рынок.

The Japanese authorities have found themselves at a strategic juncture: between the desire to support growth through fiscal stimulus and the need to maintain market confidence in the sustainability of public finances. The situation requires not just policy declarations, but a comprehensive plan of action that can stabilize expectations and keep borrowing costs under control.