JGB yield at 1.595%…Highest in 17 years

Fiscal spending expected to increase if opposition wins in House of Councillors election

Demand for long-term government bonds declines due to expectations of increased government spending

Ahead of Japan's House of Councillors election, the yield on Japan’s 10-year government bonds rose to its highest level since 2008. Long-term government bond yields climbed to their highest levels in 26 years. This is due to anticipation that the ruling party will lose the House of Councillors election this weekend and that the next government will increase expenditures.

Previously, the U.S. 30-year Treasury yield closed up for the third straight session, reaching 4.97%—a one-month high—amid concerns ahead of an inflation report. The rise in U.S. Treasury yields is attributed to fears that fiscal deficit management may become impossible, due to the Trump Administration’s tax and spending bill (OBBB), and that the impact of tariffs may appear in June’s Consumer Price Index (CPI) to be released that day.

According to Bloomberg on the 15th (local time), the yield on Japan’s 10-year government bond climbed 2.5 basis points (1bp = 0.01%) to reach 1.595% on the day. Yields on 20-year and 30-year super-long-term government bonds also hit their highest intraday levels since 1999, but eased slightly in the afternoon. The 10-year JGB yield has a significant impact as it directly affects household and corporate expenditures through mortgage rates and other borrowing costs.

With defeat for the ruling party anticipated in Japan’s House of Councillors election on the 20th, a surge in government spending is expected to place additional upward pressure on bond yields. Competing parties are running populist campaigns, including pledges for cash handouts. According to opinion polls, the ruling Liberal Democratic Party (LDP) is projected to fail in securing a majority.

Amir Anvarzadeh, Japanese equity strategist at Asymmetric Advisors, commented that “bond vigilantes are eyeing Japan.” He pointed out, “Japan has a debt-to-GDP ratio of about 250%, and a quarter of its annual budget is allocated to refinancing low-interest debt, while politicians are now discussing tax cuts.” Bond vigilantes refer to market participants who send warnings to governments by offloading large amounts of government bonds and driving up yields when fiscal health is perceived to be weakening due to excessive spending.

This wave of massive JGB selling in the market, which exceeds ¥1 quadrillion, has also occurred in other countries’ bond markets where reckless tax cuts or excessive spending have taken place. The U.S. also experienced this several times while the Trump Administration was passing tax and spending bills (OBBB).

Ryosei Akazawa, Minister for Economic Revitalization, stated that the government is closely monitoring movements in Japan’s government bond market. He added that fiscal concerns will not become an impediment to the government’s allocation of funds needed to meet economic goals.

Takahiro Otsuka, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities, said, “I am not confident that the 10-year yield will remain below 1.6%.”

Despite the Ministry of Finance Japan deciding to reduce super-long-term bond issuance, the rise in JGB yields appears to be due to sluggish demand. The Bank of Japan is gradually tapering bond purchases, but major life insurers, a key group of market participants, are also refraining from purchasing super-long-term bonds, creating a demand gap.

Tadashi Matsukawa, head of bond investments at PineBridge Investments Japan, predicted that “the selling environment for bonds will continue.”

Byline: Jeong-A Kim, Guest Reporter kja@hankyung.com