Japan Government Bond Rout Deepens as Election Spending Fears Shake Markets

Japan’s government bond market is experiencing a sharp sell-off as investors react nervously to rising political promises of tax cuts and fiscal stimulus ahead of a snap election. Prime Minister Sanae Takaichi’s decision to dissolve parliament and campaign on an expansionary platform has amplified concerns about Japan’s already massive public debt, the largest among developed economies.

Bond yields surged across the long end of the curve after politicians from multiple parties pledged new spending measures, including a proposed two-year suspension of a food levy that could cost the government an estimated 5 trillion yen annually. Markets have struggled to see how such policies would be financed, triggering a rapid repricing of Japanese government bonds (JGBs). Dealers reported a lack of buyers as 20-year, 30-year, and 40-year bond yields climbed to record highs, drawing comparisons to the UK gilt crisis of 2022.

The sell-off has been especially severe in super-long maturities. Twenty-year yields jumped nearly 30 basis points in just two days, while 30-year and 40-year yields surged around 40 basis points, pushing borrowing costs well above recent norms. Ten-year yields also posted their sharpest two-day rise since the Bank of Japan relaxed its yield cap in 2022, underscoring how quickly market sentiment has shifted.

Investors are increasingly worried that Japan’s era of ultra-cheap money is ending. Inflation has stayed above the Bank of Japan’s target for almost four years, yet policymakers have been slow to tighten monetary conditions. Combined with aggressive fiscal rhetoric, this has raised doubts about the credibility of Japan’s policy anchors and weighed on the yen, which has continued to weaken.

While long-dated JGBs are largely held by domestic insurers who tend to hold them to maturity, the broader market impact is becoming harder to ignore. Equity markets have pulled back, auctions have shown weakening demand, and global bond markets have felt spillover pressure. With weeks left in the election campaign and no clear signal of fiscal restraint, analysts warn that investor confidence may remain fragile, leaving Japan’s bond market vulnerable to further volatility.