Japan 10-Year Bond Yield Nears 3% for First Time in 30 Years as 140 Trillion Yen Budget Stirs Jitters

Market Jitters Grow Over 140 Trillion Yen Budget

Japan Long-Term Yield Hits Highest Since 1996

Japan’s bond market is on edge as Prime Minister Sanae Takaichi’s push for aggressive fiscal spending coincides with expectations of additional interest-rate increases. With budget requests for fiscal 2027, which runs from April 2027 to March 2028, set to swell to around a record 140 trillion yen, Japan’s benchmark long-term yield has climbed to just shy of 3%, its highest level in three decades.

In trading on Aug. 31, the yield on newly issued 10-year Japanese government bonds, the benchmark for long-term rates, rose as high as 2.950%. That was the highest level since September 1996 and up 0.030 percentage point from the end of last week. The move put the 3% threshold, a key psychological marker, within reach.

The immediate catalyst for the rise in yields is the Bank of Japan’s tightening stance. After the Federal Reserve signaled the possibility of further rate increases and the yen weakened back into the 160-per-dollar range, markets increasingly bet the BOJ will accelerate rate hikes to counter inflation pressure from the weaker currency.

Another factor driving long-term yields higher is the Takaichi government’s fiscal expansion. Budget requests from central government ministries for fiscal 2027 are projected to total about 140 trillion yen based only on programs with specified amounts, which would mark a record. That compares with the initial fiscal 2026 budget of 122.3 trillion yen.

The Takaichi government plans to scale back the longstanding practice of drawing up large supplementary budgets every year and instead incorporate needed projects into the initial budget. It also created a separate budget framework for crisis management and growth investment, with no ceiling on ministry requests.

That approach is already pushing up ministry demands. The Ministry of Land, Infrastructure, Transport and Tourism requested 8.7 trillion yen, about 40% more than in the initial fiscal 2026 budget. The Ministry of Defense requested 8.9 trillion yen for fiscal 2027, about 100 billion yen more than the initial fiscal 2026 budget, though the figure could rise further depending on revisions to three key national security documents due at year-end.

The challenge is funding. For years, Japan’s government has depended on new bond issuance because tax revenue and non-tax income have fallen short of covering spending. In the market, keeping next year’s new government bond issuance to around 40 trillion yen is regarded as the line for preserving fiscal credibility.

The Takaichi government also plans to lower the consumption tax rate on food starting next spring. The resulting loss in tax revenue is estimated at about 4 trillion yen. Takaichi has said the government will not rely on deficit-financing bonds, but the central question is how it will pay for both tax cuts and higher spending at the same time.

Japan’s financial industry is concerned that if new bond issuance rises sharply while monetary policy normalization is already pushing government bond yields higher, bond prices could fall further and yields could climb more. Higher yields would in turn raise the government’s interest burden and add to fiscal strain.

The more the government increases bond issuance to fund aggressive fiscal policy, the more yields rise. Those higher yields, in turn, could hamper the very fiscal expansion they are meant to support.

Man-su Choi, Tokyo correspondent bebop@hankyung.com