Japanese government bonds faced heavy selling pressure on December 17, with the yield on 10-year notes soaring to 1.978%—the highest level since June 2007—approaching the psychologically significant 2% threshold untouched for nearly two decades. Analysts attribute the sustained climb in yields to mounting expectations that the Bank of Japan (BOJ) will raise interest rates.
The upward trajectory is further fueled by speculation about expansionary fiscal policies under Prime Minister Sanae Takaichi, raising concerns that increased bond issuance to fund economic stimulus could worsen Japan's fiscal health.
Market participants widely anticipate the BOJ will hike rates by 25 basis points at its upcoming policy meeting, lifting short-term rates from 0.5% to 0.75%—a three-decade peak. Governor Kazuo Ueda is expected to reaffirm the central bank's commitment to further tightening, though the pace of future hikes will depend on economic responses.
Despite Takaichi's historical preference for monetary easing and fiscal stimulus, the government appears to have greenlit this week's anticipated rate increase. Finance Minister Satsuki Katayama stated there's "no divergence" between the government and BOJ's economic outlook, signaling tacit approval.
A recent BOJ survey revealed most regional branches predict significant wage hikes by Japanese firms next year due to worsening labor shortages, creating conditions conducive to rate normalization. Former BOJ Deputy Governor Masazumi Wakatabe cautioned against premature tightening but acknowledged that fiscal-driven rises in neutral rates would naturally warrant higher policy rates.
Meanwhile, Takaichi's record 18.3 trillion yen ($118 billion) supplementary budget—30% larger than last year's—passed parliamentary approval on December 16. Over 60% will be funded by new bond issuance, including 11.69 trillion yen in additional debt. The package allocates 8.9 trillion yen for inflation relief, 6.4 trillion yen for AI and shipbuilding investments, and boosts defense spending to 2% of GDP.
Critics warn Takaichi's spending spree without structural reforms risks accelerating yen depreciation, inflation, and deteriorating bond market confidence, potentially undermining Japan's economic sustainability.
Comments