Fiscal uncertainty pushes Japan's 40-year bond yield to decades-high

Japan’s 40-year bond yields rose to 4%, the highest level since this bond was first issued in 2007. In fact, no Japanese government bond of any maturity has had such a high yield in over 30 years. This movement was due to concerns about a proposed sales tax cut on food, supported by Prime Minister Sanae Takaichi. In addition, the emergence of the Centrist Reform Alliance has further increased uncertainty by raising the risk of electoral competition leading to looser fiscal commitments.

In mundane terms: cutting sales tax or increasing government spending reduces government revenue, which usually means higher budget deficits. Higher deficits often require the government to issue more bonds, thus causing bond prices to fall and yields rise. In even more simple terms, investors worry that Japan may need to borrow more in the future, which makes existing bonds less attractive unless they offer higher yields.

More about Sanae Takaichi

Ideologically, she sits on the right wing of the LDP, but on economics she is closer to state-led growth than to austerity. While the LDP has long accepted large deficits, previous leaders emphasised eventual consolidation and protecting the tax base. Takaichi’s camp is more explicit that deficits are acceptable if they support growth, security and households.

Who are the Centrist Reform Alliance (Chūdō)

This entity is a new Japanese political party formed in January 2026 by the merger of the main opposition Constitutional Democratic Party of Japan (CDP) and Komeito, aiming to offer "people-first" policies by building consensus, especially ahead of an anticipated general election. The alliance focuses on sustainable economic growth, social security, a higher tolerance for structural deficits, and a realistic, pragmatic approach to defense & energy. Notably, it presents itself as an alternative to divisive politics. Chūdō sits between traditional opposition parties and the ruling conservatives. It is not anti-market or radical, but it is explicitly reformist and more willing to challenge Japan’s long-standing fiscal and tax structures.

The Repricing and Global Spillover Risks

The recent jump in yields signals a turning point for Japan’s bond market, which for years was characterised by ultra-low interest rates that kept yields far below those of other advanced economies. The 20-year yield has increased by 71 basis points, while yields on 30- and 40-year bonds have risen by close to 60 basis points since October. Overseas investors, who now make up about 65% of monthly cash trading in Japanese government bonds. This movement has begun to enhance the appeal of Japanese government bonds for long-term investors, particularly when compared with European sovereign debt. On a currency-hedging basis, investors can now earn more on long-dated Japanese bonds than on comparable US or European bonds. At the same time, pessimism in the domestic bond market deepened after data showed that Japanese insurers sold a record ¥822.4 billion worth of bonds with original maturities longer than 10 years. (Japan Securities Dealers Association, 2025; Bloomberg, 2025)

As one of the world’s largest government bond markets and a major source of global capital, increase in Japanese yields means investors would rebalance portfolios and trigger dumps elsewhere. As a result, borrowing costs aboard would experience upward pressures. Historically, past stress in Japan’s bond market has coincided with rising yields in countries such as the United States and Germany.

With elections approaching, fiscal promises under scrutiny, and global investors once again paying close attention to Japan’s bond market - and future auction outcomes and policy signals will be closely watched.