Japan 10-year bond yields reach 1996 highs, market questions Takamichi Takashi's 'increase spending, not debt' stance
Miles Bennett
Japan's 30-year yield broke 4% and the 10-year hit levels unseen since 1996, after PM Sanae Takaichi reversed course on supplementary spending — the bond market responded with a vote of no confidence.
How high did yields actually go?
On May 20, Japan's 10-year government bond yield rose to 2.809%, the highest since 1996.
The 30-year yield crossed 4% on the same day. In plain terms = the cost of borrowing for 30 years is back to levels from a different era.
This reflects a rapid erosion of market confidence in Japan's ability to service its debt.
What did the PM say that spooked the market?
Sanae Takaichi announced a supplementary budget of roughly ¥3 trillion (~$19 billion) to cushion households from energy-price spikes driven by the Iran war.
The critical twist: she had previously stated no extra spending was needed — this is a full policy U-turn.
She also pledged that total bond issuance for calendar-year 2026 would stay unchanged, with deficit-covering bonds funding the new spending. This means → the government wants to spend more while claiming it won't borrow more — a contradiction the market spotted immediately.
Why is the "calendar year" framing a red flag?
Jesper Koll, expert director at Monex Group, noted that Takaichi framed her issuance plan using "calendar year" rather than Japan's standard fiscal year (ending March 31).
In plain terms = Japan has never set fiscal policy on a calendar-year basis. Switching the window looks like an attempt to make the numbers fit.
Koll was blunt: "The bond market isn't stupid. You can't increase spending without increasing debt."
Why would announcing more debt actually be more credible?
Koll made a counterintuitive point: if the government had simply announced ¥10 trillion in new bonds with a clear purpose, the market would have been more willing to accept it.
Instead, the combination of a smaller figure plus a "no extra issuance" pledge deepened investor suspicion.
This means → markets reward honesty, not optics. A frank large number is more credible than an artful small one.
What other pressures are pushing yields higher?
Julius Baer analyst Louis Chua pointed to a triple squeeze: Middle East uncertainty, elevated commodity prices, and rising fuel-subsidy costs.
The yen is hovering near 160, close to the level widely seen as a trigger for central-bank intervention.
Koll summarized: rising inflation, Bank of Japan rate hikes, and growing bond supply are all becoming "increasingly certain." This reflects a yield move driven not by one event but by multiple lines tightening at once.
Is anyone still bullish on Japan?
Krishna Bhimavarapu, Asia-Pacific economist at State Street Investment Management, said the firm remains "structurally bullish" on Japan's economy.
He described the supplementary budget as "more of a targeted buffer against energy-price pressure than large-scale demand stimulus," consistent with Takaichi's governing philosophy.
Supporting data: Q1 GDP grew at an annualized 2.1%, and April exports rose 14.8% year-on-year, with semiconductor and AI-related demand a major contributor. In plain terms = the economy itself hasn't collapsed — the problem is how the government borrows and whether the market trusts the process.
Japan's bond sell-off — fiscal-crisis prelude or growing pain?
BULL
Fundamentals still healthy
Q1 GDP grew 2.1% annualized; exports up 14.8%.
Budget is targeted, not massive
¥3 trillion is a directed cushion, not broad stimulus.
Corporate momentum intact
Restructuring, M&A, and PE inflows still support equities.
BEAR
Fiscal credibility damaged
A U-turn plus a window-dressing metric erodes trust.
Triple pressure building
Middle East risk, high oil prices, and yen weakness all at once.
Rate-hike expectations firming
Rising inflation makes BOJ tightening more certain, pressuring bonds.
In plain terms = the economic foundation is intact, but the way the government is borrowing makes markets uneasy — the question isn't 'Is Japan broken?' but 'Can this administration's fiscal discipline still be trusted?'
The bond market isn't stupid. You can't increase spending without increasing debt.
Jesper Koll
Expert Director, Monex Group
(May 2025, commenting on PM Takaichi's supplementary-budget announcement)
Content is for reference only, not financial advice.