'Japan, the party is over' in turmoil... France facing unprecedented crisis

The Trap of National Debt... Next Year, Japan Alone Faces ¥13 Trillion in Bond Interest; France's Cabinet 'Staggers'

Japan, Government Debt '236%' of GDP

Expectations of a Rate Hike in October Soar

10-Year Bond Yield Hits 17-Year High

Projected Interest Rate Rise Pushes Up Bond Costs Next Year

Total Bond Expenses, Including Principal Repayment, Hit a Record ¥32 Trillion

'€3.3 Trillion' Debt Pile Facing France

Government's Austerity Push Faces Opposition From Parliament

Political Instability Shakes Bond and Stock Markets

10-Year Yield at 3.53%, Highest Since March

CAC 40 Index Plunged Over 2% at One Point

Japan and France are being hit by the boomerang of national debt. For Japan, the impact of interest rate hikes means it will need to pay over ¥120 trillion just in bond interest next year. That’s a 24% increase in government bond interest payments from this year. In France, clashes between a government trying to cut national debt and opposition parties have put the cabinet on the verge of collapse, sending shockwaves through French financial markets.

Japan’s government is expected to bear around ¥13 trillion solely in bond interest payments next year—a record high, up 24% from this year. The increase in bond yields (and fall in bond prices) comes amid speculation that the Bank of Japan may raise interest rates and opposition demands for a reduction in the consumption tax.

According to Nihon Keizai Shimbun, the Ministry of Finance of Japan included ¥13.0435 trillion (about ₩123 trillion) in its budget request for 2026, presented the previous day, just for bond interest expenses. Due to the recent rise in long-term interest rates, the projected rate used to calculate interest payments was raised from this year’s annual 2.0% to 2.6% for next year. The combined total of bond expenses, including principal repayments, will reach ¥32.3865 trillion, a 15% increase from this year. This will be the first time annual bond expenses exceed ¥30 trillion.

The Ministry set next year’s projected rate at 2.6% because the 10-year yield, Japan’s key long-term rate, has been climbing daily. On this day, the 10-year bond yield temporarily marked a 17-year high of 1.625%. Yields for 20-year (2.65%), 30-year (3.235%), and 40-year (3.435%) bonds also surged in succession.

The surge in bond yields is attributed to expectations of a further policy rate hike by the Bank of Japan due to rising inflation. Market observers believe the central bank could raise rates as early as October. Since raising its policy rate from 0.25% to 0.5% in January, the Bank of Japan has kept it unchanged in four monetary policy meetings through July. Nihon Keizai Shimbun commented that "the era of the 'easy policy party' has ended now that the Bank of Japan is moving to hike rates."

Another driver behind the bond yield surge is the ruling Liberal Democratic Party (LDP) becoming a 'minority party' in both the House of Representatives and the House of Councillors, pushing up fiscal spending pressure. Opposition parties, whose cooperation is needed for smooth governance, are demanding, among other things, a consumption tax cut. Investors are increasingly worried that the Japanese government’s issuance of deficit-financing bonds will worsen public finances, making Japanese government bonds—traditionally a safe asset—less attractive. Nihon Keizai Shimbun warned, "Rising long-term interest rates will increase fiscal burdens and could trigger a vicious cycle, leading to even higher rates."

The root cause of ballooning bond expenses is the sharp rise in government debt. As of the end of last year, outstanding Japanese national bonds totaled ¥1,105 trillion. The government debt ratio was a world-leading 236.7% of GDP. Even a slight increase in rates can sharply boost debt payments.

Government debt continues to rise due to surging social security costs stemming from low birthrates and population aging. Next year’s Japanese government budget request is expected to top ¥120 trillion—a new record. Of this, the largest share is for the Ministry of Health, Labour and Welfare, at an all-time high of ¥34.7929 trillion. Prime Minister Shigeru Ishiba said at the House of Councillors Budget Committee last May, “Japan’s fiscal situation is extremely poor—even worse than Greece.”

Debt Warnings... Volatile Markets

French bond yields surged after the government announced spending cuts aimed at containing national debt, prompting backlash from opposition parties. Prime Minister François Bayrou’s announcement that he would seek a vote of confidence from parliament over the austerity budget raised the risk of cabinet collapse and rocked the bond market.

According to Investing.com, France’s 10-year government bond yield soared to 3.53% on the 26th (local time)—the highest since March—rising over 0.5 percentage points from a year earlier. The yield gap with the 10-year German government bond (2.72%), considered a safe asset in Europe, widened to 0.8 percentage points. This reflects investors demanding a risk premium for French government bonds.

France’s stock market was also rattled. The CAC 40 Index—France's key stock market index based on the top 40 companies by market capitalization—plunged into the 2% range at one point. In the afternoon, losses narrowed, closing down 1.7%, but anxiety remained.

The shock to French financial markets stems from political instability. Prime Minister Bayrou announced he would ask the lower house for a vote of confidence on August 8 to pass the austerity budget. The opposition, eager for an opportunity to attack the government, promptly declared support for a vote of no confidence, throwing French politics into chaos.

Just last year, the cabinet led by then Prime Minister Michel Barnier was toppled after a vote of no confidence in parliament—the first such government fall since the Georges Pompidou cabinet in 1962. The defeat of the austerity budget was the main reason then as well.

At a press briefing the previous day, Prime Minister Bayrou said the nation's fiscal situation could no longer be ignored and emphasized the need for austerity. According to the International Monetary Fund (IMF), France’s national debt reached €3.3 trillion (about ₩5,351 trillion) as of last year—equivalent to 113% of GDP, higher than Germany (63.8%), Netherlands (43.2%), or Finland (8.5%). The main causes include the COVID-19 pandemic, the energy crisis triggered by Russia, and various welfare expenditures. Last year, French government spending accounted for 57.4% of GDP.

Bayrou claimed that the French public still does not grasp the seriousness of the situation, and said he was resorting to a “vote of confidence” as a shock measure. This move is calculated to secure political momentum for austerity in the face of strong public pushback by obtaining parliamentary backing.

However, French media labeled Bayrou’s request for a confidence vote as “suicidal,” arguing that since centrist parties do not hold an absolute majority in parliament, it will be difficult to pass, with both left and right-wing forces strongly opposing government policy. Amid threats from the opposition to table a no-confidence motion, President Emmanuel Macron emphasized, “Political forces must seek compromise and stability and fulfill their responsibilities accordingly.” Although the opposition is calling for the president’s resignation, Macron retorted, “The presidency exists to fulfill its mandate and do what is believed right for the country,” and stated he would “continue to the very end.”

If a parliamentary majority votes no confidence, Bayrou’s government will collapse. In that case, President Macron would need to appoint a new prime minister or consider dissolving the assembly. Macron reportedly hesitates to dissolve parliament, fearing that snap elections could further empower far-right and far-left forces.

Tokyo = Ilgyu Kim, Correspondent / Juwan Kim, Reporter black0419@hankyung.com