Japanese debt crisis reappearing? Fiscal stimulus concerns intensify, Japan faces triple blow in stocks, bonds, and currency, long-term bond yields hit new highs again.

Japanese debt crisis reappearing? Fiscal stimulus concerns intensify, Japan faces triple blow in stocks, bonds, and currency, long-term bond yields hit new highs again.

Concerns over a new round of large-scale economic stimulus are causing upheaval in Japan’s bond market. Investors worry that Prime Minister Sanae Takaichi’s fiscal expansion will weaken Japan’s already fragile public finances, triggering a wave of selling that is pushing long-term Japanese government bond yields to record highs and increasing downward pressure on the yen, causing equities, bonds, and the currency to all come under strain in Japan’s financial markets.

On Tuesday, the prices of long-term Japanese government bonds plunged further. The yield on 40-year government bonds surged 8 basis points to 3.68%, the highest since that issue was launched in 2007. Meanwhile, the yields on 20-year and 30-year bonds both rose by at least 4 basis points, with the 30-year yield just a step away from its historic high.

The yen exchange rate was also affected, dropping below the key psychological level of 155 against the dollar earlier on Tuesday, and hitting a historic low of 180 against the euro.

The Nikkei 225 index closed down 3.2% at 48,702.98 points. The TOPIX index finished down 2.9%.

The core of market turmoil is speculation about the size of the upcoming economic stimulus plan from Takaichi’s cabinet. According to surveys, the market widely expects the plan to exceed last year’s 13.9 trillion yen (about $89.8 billion). Japan’s Finance Minister Satsuki Katayama said Tuesday that while she could not disclose details at this stage, the plan “has already expanded in scale so far”, a comment that deepened investor anxiety on fears that larger new debt issuance might threaten market stability.

Rising Fiscal Expansion Expectations, Huge Pressure for New Debt Issuance

The main concern driving market volatility is the actual size of the Takaichi administration’s economic stimulus proposal. Survey results show that the market expects this proposal to exceed last fiscal year’s figure of 13.9 trillion yen (about $89.8 billion). This expectation was partially confirmed on Tuesday, as Finance Minister Satsuki Katayama stated that while details could not be commented at present, the stimulus “has already become quite sizable.”

Investors are focusing on the “actual spending” figures in the plan to assess whether new debt issuance might threaten market stability in Japan. Takaichi has repeatedly affirmed her willingness to increase spending if needed to boost growth, a stance that has directly driven rising bond yields and a weakening yen.

Kazuya Fujiwara, fixed income strategist at Mizuho Securities, said:

“Until the government announces the economic package on November 21, bond purchases may continue to be limited.”

He added that investors are also reluctant to buy longer-term bonds ahead of the 20-year bond auction.

Pressure Inside the Ruling Party, Stimulus Size May Far Exceed Expectations

Pressure from inside the ruling Liberal Democratic Party may prompt Takaichi to take even more aggressive fiscal measures. According to reports, a group of lawmakers from the LDP known as the “Responsible Expansionary Fiscal Policy Core Group” submitted a proposal to Takaichi on Tuesday, calling for a supplementary budget worth around 25 trillion yen (about $161 billion) to support the forthcoming stimulus measures.

This figure far exceeds previous media reports of a roughly 14 trillion yen supplementary budget and a total package size of 17 trillion yen. Akira Yoshii, a member of the group, said to reporters after the meeting:

“The prime minister did not mention a specific amount, but she said she hopes to deliver a plan that will satisfy us.”

Meanwhile, the group stated in its proposal that market concerns about a potential loss of confidence in Japanese government bonds and rising yields are “overblown and unsupported by data or global consensus.”

However, according to media reports on Monday, Goushi Kataoka, a private sector member from a key government panel, also called for Japan to devise around a 23 trillion yen stimulus plan. Amid the widespread calls for fiscal expansion, there are also some dissenting voices. Takaichi’s special advisor Takashi Endo told reporters Tuesday that Japan will set up an agency next week similar to the US Office of Government Efficiency (DOGE) to discuss cutting unnecessary expenditures.

Fragile Market Confidence, Key Auction Approaching

Market sentiment for the upcoming 20-year government bond auction is extremely pessimistic. On Wednesday, Japan’s Ministry of Finance will auction about 800 billion yen (about $5.16 billion) of 20-year bonds, and analysts widely anticipate very weak demand.

Okasan Securities chief bond strategist Naoya Hasegawa said:

“The market initially had a positive outlook on Takaichi’s spending plan, but later found that the scale of the economic stimulus seems to keep expanding.”

He believes that for the 20-year bond auction, “this is a bad time,” and “if demand is weak, yields could rise even further.”

The Japanese government bond yield curve is steepening sharply, reflecting investors pricing in an expenditure plan that far exceeds expectations and further delays in rate hikes from the central bank. The benchmark 10-year government bond yield rose 1.5 basis points to 1.745% on Tuesday, earlier touching a high of 1.755%, the highest since June 2008.

Steepening of the yield curve—meaning long-term yields are rising much faster than short-term yields—reflects complex market expectations: on one hand, massive government borrowing will push up long-term risk premiums, while on the other hand, the central bank may delay further rate hikes due to economic fundamentals and the government’s fiscal stance.

Currently, the 2-year Japanese government bond yield edged down 0.5 basis points to 0.925% on Tuesday, while the 5-year yield was unchanged at 1.255%, marking a stark contrast to the soaring long-term yields. Under heavy pressure from fiscal expansion, how the central bank balances its dual mandate of price stability and financial market stability will be critical in determining the future direction of Japan’s markets.

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