Japan’s 10-Year Yield Peaks: What’s Driving the Rise?

Japan’s 10-year government bond yield approached 1.60% on Wednesday, July 16, reaching its highest level since late 2008. That marks a rise of over 45% since the start of the year. The upward movement is part of a broader shift across the yield curve, with the 30-year JGB hitting a record 3.21%, and the 20-year yield rising to 2.65%—its highest level since 1999.

This sharp repricing comes at a politically sensitive time. Just days before the Upper House election on July 20, markets are digesting a complex mix of fiscal policy speculation, tax reform pledges, and renewed geopolitical trade risks—all of which are converging to alter expectations around Japan’s interest rate environment.

Rising Yields Reflect Fiscal Policy Anticipation Ahead of the Election

A major driver of the recent climb in Japanese government bond yields is market anticipation of looser fiscal policy. As noted by Ken Matsumoto, Japan macro strategist at Crédit Agricole CIB, “Japan’s long yields and super-long yields are currently rising due to expectations of fiscal expansion after the Upper House election.”

In the run-up to the vote, multiple political parties have proposed expanded spending and potential tax reductions. The Constitutional Democratic Party of Japan (CDP), the largest opposition party, has made a cut to the consumption tax a central campaign pledge.

What sets this election cycle apart is the shifting political landscape. Following the ruling Liberal Democratic Party–Komeito coalition’s loss of its Lower House majority in 2024, the outcome of the Upper House vote may determine whether such fiscal measures—once considered politically unrealistic—move closer to implementation.

Consumption Tax Debate Highlights Policy Trade-offs

Japan’s consumption tax rate currently stands at 10%, with a reduced 8% rate applicable to food. The last hike, implemented in 2019, aimed to shore up funding for the nation’s social security system amid rising demographic pressures from an aging population.

Prime Minister Shigeru Ishiba, who leads the LDP, remains opposed to cutting the tax, arguing that it is vital for maintaining Japan’s social welfare programs. “Social welfare costs will continue to rise from now on,” Ishiba warned in a recent televised debate, stressing that repealing or reducing the tax could undermine fiscal stability.

Moreover, Ishiba noted that any change to the tax rate would take approximately a year to implement—rendering it ineffective as a near-term measure to counter rising costs. Instead, the LDP-Komeito coalition is proposing direct cash handouts of ¥20,000 ($139) per person, which could be executed more swiftly. Still, bond markets remain focused on the long-term implications for fiscal discipline and debt sustainability.

Geopolitical Trade Risks Reinforce Upward Pressure on Yields

The domestic fiscal outlook is further clouded by rising external uncertainty. On July 7, U.S. President Donald Trump announced a 25% tariff on imports from Japan and South Korea, effective August 1. He also floated even steeper duties—potentially up to 35%—while criticizing Japan for its limited purchases of American goods, particularly in the automotive and agricultural sectors.

These trade threats are already reshaping policy discussions within Japan. DPP leader Yuichiro Tamaki has publicly argued that if U.S. tariffs are enacted, a consumption tax cut may become essential to support households and businesses.

From a market perspective, heightened trade tensions increase the likelihood of further fiscal support, which in turn implies greater debt issuance—a dynamic already contributing to the rise in long-term yields.

Japan’s Debt Burden Casts a Long Shadow

Beyond near-term political and trade developments, structural fiscal challenges remain a fundamental concern. Japan holds the highest public debt ratio among advanced economies, at approximately 250% of GDP. When private-sector liabilities are included, total debt climbs to over 600% of GDP.

Despite recurring calls for fiscal consolidation, current political momentum appears to favor expansionary measures. Fitch Ratings, which assigns Japan an ‘A’ sovereign rating with a stable outlook, warned this week that fiscal policy poses the greatest risk to Japan’s credit profile.

“Calls for aggressive spending and consumption tax cuts ahead of the election could undermine fiscal discipline,” Fitch stated. Unfunded tax cuts or stimulus that fails to deliver substantial economic growth would widen deficits and accelerate Japan’s already steep debt trajectory—potentially pressuring its sovereign rating over time.

Bottom-Line

The surge in Japanese long-term bond yields is not simply a response to technical market factors. It reflects a broader repricing of Japan’s fiscal outlook, political uncertainty, and external vulnerabilities.

With the Upper House election set for July 20, the results could significantly influence the country’s near- and medium-term policy direction. For now, investors appear to be positioning for a potential pivot toward greater fiscal stimulus, a looser budgetary stance, and ongoing trade headwinds—all of which suggest upward pressure on yields may persist.

Sources: CNBC, Reuters, The Japan Times, Japanese Ministry of Finance