Japan bond yields hit multi-decade highs as fiscal fears mount ahead of election

CNBC

15-07-2025

Japan's benchmark 10-year government bond yield climbed to its highest level since 2008 on Tuesday as concerns about fiscal spending mount ahead of an upper house election.
Yields on the 10-year instrument climbed to 1.599%, the highest since 2008, data from LSEG showed. Yields on the 30-year JGB also rose to a record high of 3.21%, while Japan's 20-year government bond yields spiked to their highest level since 1999.
"Japan's long yields and super-long yields are currently rising due to expectations of fiscal expansion after the Upper House election coming up next week," said Ken Matsumoto, Japan macro strategist at Credit Agricole CIB.
A sizable number of Japanese politicians and parties are actively discussing consumption tax cuts ahead of the upper house election set to take place Sunday.
Japan Prime Minister Shigeru Ishiba has maintained that he will not resort to tax cuts funded by more debt issuance, although opposition parties are calling for tax cuts and more spending, which could lead to more debt.
This political uncertainty is creating doubt over whether Japan's government will stick to fiscal discipline, said Vishnu Varathan, Mizuho Securities' head of macro research for Asia ex-Japan.
Japan has one of the world's highest levels of public debt relative to the size of its economy. While the government has flagged the need for more fiscal discipline, it relies heavily on issuing new debt to fund its obligations. Tax revenues alone are insufficient to cover the government's expenses.
"The most recent trigger is the election. People are concerned about the election because the politicians are talking about consumption tax cuts, and tax cuts of any sort in Japan is suicidal," said Amir Anvarzadeh, Japan equity market strategist at Asymmetric Advisors, who added that tax cuts would be dire given the fiscal situation that Japan is facing.
"This is why the bond vigilantes are out. And they're saying: we need more yield to invest in the bond market. So there's a shorting [going on] in the JGB market," he told CNBC.
Aside from the upcoming election, there are underlying factors at play that could bring forward the Bank of Japan's next rate hike. While still at elevated levels, Tokyo's inflation eased to 3.1% year on year in June, slower than the 3.6% in May.
"This could prompt the BOJ to revise its inflation forecast upward, potentially accelerating the timeline for its next rate hike," said Carlos Casanova, senior economist for Asia at Union Bancaire Privée.
On top of that, supply-demand imbalances in the Japanese bond markets could become more pronounced, especially as life insurers have less capacity to absorb additional supply, said Masahiko Loo, senior fixed income strategist at State Street Investment Management.
In June, the Bank of Japan said it would slow the pace of its government bond purchase reductions starting April next year, and kept its benchmark interest rate steady at 0.5% as economic risks mount. The BOJ reiterated plans to trim its monthly Japanese government bond purchases by roughly 400 billion yen ($2.76 billion) each quarter to about 3 trillion yen till March 2026, in line with guidance set last year.