Japanese government bond yields hit multi-year highs amid growing concerns about the country's fiscal sustainability ahead of an election to the upper house of parliament. Investors are reacting to the political rhetoric surrounding a possible reduction in the consumption tax, which increases the pressure on public finances.
According to the latest data, the yield on 10-year Japanese government bonds rose to 1.599% — the highest level since 2008. The 30-year yield reached a record 3.21%, while the 20-year yield was the highest since 1999. Such values signal growing market concerns about future government spending and sources of funding.
Fiscal expectations are fueled by discussions of possible tax breaks. Some political forces suggest reducing the consumption tax, which could potentially increase government borrowing. At the same time, Prime Minister Shigeru Ishiba said that he does not intend to cover tax breaks at the expense of the new debt. However, the market is doubtful about maintaining strict budget discipline amid the pre-election struggle.
Japan remains one of the most heavily indebted economies in the world, and tax revenues do not cover all budget obligations. A significant part of the expenses is financed by issuing new debt securities.
Financial analysts note that risks are growing against the background of a possible strengthening of monetary policy. Tokyo's inflation rate fell from 3.6% in May to 3.1% in June, but remains high. This may lead to a revision of the Bank of Japan's inflation forecast and accelerate the transition to an interest rate hike.
In addition, the imbalance between supply and demand in the bond market is growing. According to analysts, insurance companies are losing the ability to actively buy government bonds, and the reduction in the volume of purchases of securities by the Bank of Japan starting in April 2026 will only increase pressure on the market.
The problems in the debt market are also compounded by structural factors-Japan faces demographic aging, weak domestic demand and limited economic growth potential. Experts predict that in the absence of large-scale structural reforms, the government will have to maneuver between the need to support the economy and maintain investor confidence in the country's debt obligations.
