JGB Yields Hit Highest Since 1996 as Japan Plans to Raise Defense Spending to 3.5% of GDP
nashnova research
Japan signaled willingness to raise defense spending to 3.5% of GDP in talks with the U.S.; the benchmark 10-year yield promptly climbed to 3.04%, the highest since 1996 — the market is repricing the fiscal bill for tax cuts and rearmament at the same time.
How big a bill does 3.5% actually mean?
Japan's current defense and related spending is ¥10.6 trillion, roughly 1.5% of GDP measured against the Cabinet Office's nominal GDP forecast.
At 3.5%, the budget would reach about ¥24 trillion — more than double today's level.
This means → Japan would need to spend another entire defense budget on top of what it already has. Where the money comes from is the central question.
The Ministry of Defense has already filed a record ¥8.9 trillion request for next fiscal year, but many line items carry no stated amount — the final figure could be far higher.
Officials denied it — why isn't the market convinced?
Defense ministry spokesman Kimihito Aguin explicitly denied Japan had expressed intent to raise spending to 3.5%, stressing that defense policy is "based on Japan's own independent judgment."
But Bloomberg, citing people familiar with the talks, reported that some officials privately said they were not ready to commit formally and would deny the target if it became public.
In plain terms = the denial itself was part of the playbook the sources described — so the market chose to trust the numbers, not the wording.
The yen slid to 155.24 per dollar, a one-week low; defense stocks IHI and Kawasaki Heavy reversed intraday drops of over 2% to close up 1.8% and 0.9% respectively.
Tax cuts and rearmament at the same time — can Japan afford both?
The Takaichi cabinet this week approved a temporary cut in food consumption tax from 8% to 1% for two years, costing roughly ¥5 trillion. The government says it will not issue new debt to fund it, but has postponed the financing plan to year-end.
Separately, Takaichi announced a public-private growth investment plan worth over ¥370 trillion through 2040.
This means → three spending tracks — tax cuts, rearmament, and long-term investment — are running in parallel, each consuming money, none with a clear funding source.
Finance Minister Satsuki Katayama pledged a "comprehensive review of spending and revenue," but a voluntary audit across ministries identified only three items that could potentially be cut — this reflects how little room Japan actually has to trim.
What risk is the bond market pricing in?
The 10-year yield had already breached 3% earlier this month for the first time since 1996, driven by inflation pressure, expectations of fiscal expansion, and bets that the Bank of Japan may accelerate rate hikes.
Iwai Cosmo Securities analyst Daisuke Aiba noted: "The bond market reaction already speaks to fiscal concerns. It is hard for investors to take this kind of news positively."
In plain terms = yields doubling from a year ago to 3.04% means the cost of borrowing has doubled — for a country whose debt already exceeds 250% of GDP, every additional yen borrowed is now far more expensive than before.
Is rearmament a choice or an inevitability?
The ruling LDP noted in a June party document that 3.5% has become the global norm for defense spending, but offered no proposal on how to fund it.
Robert Ward, Japan chair at the International Institute for Strategic Studies, said policymakers have already laid the groundwork for a major increase: "Whether it's five years or ten, given the importance of the U.S.–Japan alliance, I don't think there is another option."
U.S. Deputy Secretary of Defense Elbridge Colby said last month, "We urgently want Japan to invest more," though Washington has largely avoided public pressure.
This means → the direction of rearmament is all but settled. The real open question is not "whether to spend" but "how to pay" — and until the new five-year defense plan lands at year-end, Japanese government bonds will stay under pressure.
市场有风险，内容仅供研究参考，不构成投资建议。