Japan’s government bond market faced a sharp sell-off today (December 17), with the yield on 10-year Japanese government bonds (JGBs) surging to 1.978%, its highest level since June 2007. The yield is now nearing the psychologically critical 2% threshold, a level not breached in nearly two decades. Analysts attribute the sustained rise in yields to growing expectations that the Bank of Japan (BOJ) will hike interest rates, coupled with concerns over Prime Minister Sanae Takaichi’s expansionary fiscal policies.
Market participants widely anticipate the BOJ will raise its short-term policy rate by 25 basis points to 0.75% at its upcoming meeting this Friday, which would mark the highest level in three decades. BOJ Governor Kazuo Ueda is expected to reinforce the central bank’s commitment to further tightening, though the pace of future hikes will depend on how the economy responds. Ueda previously hinted that the BOJ would provide clearer guidance on its rate trajectory after this initial adjustment.
Despite Takaichi’s historical preference for monetary easing and fiscal stimulus, the government appears to have greenlit the BOJ’s impending move. Finance Minister Tsuyoshi Takagi stated on Tuesday that there is “no divergence” between the government and the BOJ’s economic outlook, signaling tacit approval of the rate hike.
A recent BOJ survey revealed that most regional branches expect Japanese firms to continue raising wages significantly next year due to worsening labor shortages—a key precondition for further tightening. Former BOJ Deputy Governor Masazumi Wakatabe emphasized that Japan must lift its neutral rate through fiscal and growth policies, though he cautioned against premature or excessive tightening.
However, skepticism remains. Analyst Justin Low noted that Wakatabe’s comments may reflect government bias, as he serves on a policy panel appointed by Takaichi, potentially opposing the BOJ’s tightening stance.
**Fiscal Expansion Fuels Debt Concerns** Takaichi’s aggressive fiscal policies have also stoked fears over Japan’s fiscal discipline, exacerbating bond market pressures. On December 16, Japan’s upper house approved a supplementary budget for FY2025 (April 2025–March 2026), worth ¥18.3 trillion ($118 billion), with over 60% funded by new bond issuance. The budget—the largest post-pandemic stimulus—includes ¥8.9 trillion for inflation relief (tax cuts and subsidies), ¥6.4 trillion for AI and shipbuilding investments, and ¥1.1 trillion for defense, pushing total defense spending to ¥11 trillion (2% of GDP).
Critics warn that Takaichi’s reliance on debt-fueled spending, without addressing structural reforms, risks weakening the yen, fueling inflation, and undermining confidence in JGBs, jeopardizing long-term economic stability.