[Yen Carry] JGB Yields Whipsawed by Takaichi Stimulus Push, Mounting Anxiety Over Debt-Fueled Fiscal Expansion

Prime Minister Takaichi Announces Food Tax Cuts Ahead of General Election
Ultra-Long JGB Yields Surpass 4% for the First Time on Record
Global Financial Markets Grow Wary of Japan-Originated Shockwaves

As Japanese Prime Minister Sanae Takaichi unveiled a food tax cut ahead of a snap general election next month, yields on Japan’s ultra-long government bonds surged past 4% for the first time in history. The move reflects a wave of aggressive selling in Japanese government bonds, as investors priced in the growing likelihood that the Takaichi administration will resort to large-scale bond issuance to secure political momentum for an expanded stimulus agenda. With Japan having sustained expansionary fiscal policy throughout a prolonged ultra-low interest rate era, expectations that public debt will rise further amid a tightening rate environment are fueling mounting anxiety in global financial markets over a potential unwinding of the yen carry trade.

Japan’s 30- and 40-Year Yields Post an Unusual 25bp Jump

On the 20th, yields on Japan’s 40-year government bonds spiked to 4%, marking the highest level since their introduction in 2007. Yields on 30-year bonds also surged by more than 25 basis points (1bp = 0.01%). This represents the largest single-day increase since April last year’s so-called “Liberation Day,” when U.S. President Donald Trump announced reciprocal tariffs. Benchmark 10-year JGB yields, which anchor medium- to long-term rates, climbed close to 2.4%, joining the broader upward rate trend. In a market long regarded as exceptionally stable with minimal volatility, daily moves exceeding 20 basis points in 30- and 40-year JGB yields are considered extremely rare.

The decline in bond prices quickly spilled over into foreign exchange markets. As selling pressure intensified in JGBs, the yen weakened by as much as 0.3%, falling to 158.60 per dollar. This contrasted sharply with gains posted by major global currencies against the U.S. dollar on the same day. The yen’s depreciation dragged down other Asian currencies, with the Korean won down 0.4%, the Chinese yuan 0.2%, and the Singapore dollar 0.3%. Equity markets also reflected deteriorating sentiment. The Nikkei 225 broke below the 39,500 level, sliding 1.1%, while major Asian indices including the KOSPI (down 1.3%) and the Hang Seng Index (down 1.5%) recorded losses of 1–2%, underscoring heightened investor caution.

Market participants are increasingly pointing to Prime Minister Takaichi’s food tax cut pledge as the key catalyst behind the bond market turbulence. On the 19th, Takaichi announced that the 10% consumption tax applied to food items would be fully suspended for two years. Yuki Fukumoto, chief financial economist at NLI Research Institute, noted that “with no clear plan presented for how the tax cuts will be funded, markets are assuming the government will resort to bond issuance,” adding that “this inevitably reinforces the perception that Japanese bonds are difficult to buy aggressively.” The interpretation is that markets are acutely sensitive to the prospect of expanding fiscal burdens driven by tax cuts.

Former Prime Minister Ishiba Steps Down After Stressing Fiscal Discipline

The latest bout of bond market instability is amplifying investor vigilance because it extends beyond short-term policy controversy. Taxation and fiscal sustainability have already served as a crucible within Japanese politics. Former Prime Minister Shigeru Ishiba had consistently argued for confronting Japan’s fiscal reality head-on, emphasizing the need to preserve revenue bases including the consumption tax. That stance culminated in an electoral defeat and ultimately his resignation. A political decision to directly address Japan’s fiscal constraints thus ended in political exit.

Despite the political costs, Ishiba’s insistence reflected the reality of a fiscal structure already stretched to its limits. Japan has long sustained an enormous public debt load under an ultra-low interest rate environment, but that foundation is now beginning to erode as rates rise. According to Japan’s Ministry of Finance, government bond interest expenses more than doubled year on year to approximately $133 billion. At the same time, social welfare spending continues to expand amid rapid aging, while sluggish growth constrains revenue expansion, leaving limited room for prolonged fiscal largesse.

Against this backdrop, tax cuts inevitably trigger heightened market sensitivity. Expanding expenditures alongside shrinking revenues risks widening the so-called “jaws of the crocodile,” where fiscal gaps grow uncontrollably. Unlike the Ishiba administration, which exited after attempting to narrow that gap, the current government has opted to widen it further amid a rising rate environment. This is why markets are reluctant to dismiss the latest surge in JGB yields as a temporary anomaly. Investors increasingly view government pledges as signals of future fiscal direction at a time when debt management predicated on ultra-low rates is no longer viable.

Risk of a ‘Black Monday’ Replay Amid Systemic Turmoil

Concerns are further compounded by the massive stimulus package recently unveiled by Prime Minister Takaichi. At the end of last year, the Japanese government announced a comprehensive economic stimulus totaling approximately $142 billion, the largest since the COVID-19 pandemic, positioning fiscal expansion as the centerpiece of the Takaichi administration’s economic strategy. The government estimates the package will generate a real GDP boost of roughly $149 billion, with sustained effects over three years translating into an annualized growth impact of about 1.4%.

However, critics warn that the stimulus package will impose additional fiscal strain on an economy already burdened with substantial debt. To finance the measures, the government plans to compile a supplementary budget worth approximately $118 billion. Under the previous Ishiba administration, last year’s supplementary budget amounted to about $93 billion, accompanied by additional bond issuance of roughly $45 billion. Multiple Japanese government officials suggest that the scale of new bond issuance required to fund the latest stimulus is likely to exceed last year’s level.

Against this trajectory, global financial markets are increasingly voicing concerns that Japan could once again trigger significant global disruptions, reminiscent of the August 2024 Black Monday episode. Bloomberg reported that its proprietary analysis of the first month of the Takaichi administration identified a series of adverse effects, including equity declines, yen depreciation, and surging JGB yields, warning that these dynamics could culminate in turbulence driven by the unwinding of yen carry trades. Given Japanese investors’ tendency to repatriate capital once risks subside, analysts argue that a reversal of yen carry positions may ultimately prove unavoidable.

An additional source of unease is the fact that only a short period has elapsed since the last large-scale yen carry trade liquidation. JPMorgan Chase noted that “only around 50–60% of the liquidation was completed during the 2024 Black Monday episode,” adding that concerns over a potential “snapback” remain embedded in the market. The pace of rate hikes by the Bank of Japan also looms as a critical variable. BOJ Governor Kazuo Ueda raised the policy rate to 0.75% late last year and stated that the central bank would “closely monitor market conditions and consider additional measures if necessary.” Coupled with speculation that the BOJ may adjust rates at six-month intervals, talk of another yen shock resurfacing as early as June is once again gaining traction.