- Japan’s government bond market is set for an ~8% jump in net supply to about ¥65 trillion from April as the BOJ pulls back and bonds mature.
- The BOJ has lifted its policy rate to ~0.75% and cut monthly JGB buying to ~¥2.1 trillion, pushing 10-year yields above 2% for the first time since 1999.
- Despite a record ¥122.3 trillion budget with only a small rise in new issuance (~¥29.6 trillion), debt-service costs are projected to climb to ~¥31.3 trillion.
- The supply-demand shift raises risks for investors and policymakers via higher borrowing costs, duration losses, volatile foreign flows, and renewed fiscal-sustainability concerns.
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Japan is undergoing a critical transition in its sovereign debt dynamics, driven by a confluence of fiscal expansion, tightening monetary policy, and shifting supply–demand balance in the bond market.
Supply Shock and Demand Withdrawal: The net supply of government bonds is expected to rise by around 8% year-over-year to ~¥65 trillion in FY starting April 2026. This projection accounts for lower BOJ purchases (its gross monthly purchases are being cut to about ¥2.1 trillion/month) and the redemption of maturing debt.
Monetary Tightening and Yield Movements: The BOJ has raised its policy rate to 0.75%, its highest since 1995, matching rising inflation and wages. 10-year JGB yields have breached 2%, reaching levels not seen since 1999; short-term and 30-year yields similarly rising.
Fiscal Policy and Debt Costs: While Prime Minister Sanae Takaichi’s government has approved a record ¥122.3 trillion budget for FY starting April 2026, new bond issuance will only increase modestly from ¥28.6 trillion to ¥29.6 trillion. Nevertheless, debt servicing—that is, interest and redemption—will increase sharply (~10.8%) to ~¥31.3 trillion, assuming an interest rate of ~3.0%.
Risks and Strategic Implications: Rising yields denote higher borrowing costs for government, corporates, and municipalities. Portfolio managers face duration risk as bond prices remain sensitive to both policy signals and inflation expectations. Foreign investors, now more active in Japan’s bond market, may accelerate flows in and out depending on global yield differentials and yen strength. The modest increase in bond issuance despite larger fiscal misbalance raises concerns around fiscal sustainability, particularly given Japan’s debt exceeding 200% of GDP.
Open Questions:
- Will private sector demand (banks, pension funds, foreign investors) be sufficient to absorb the larger supply, especially as BOJ steps back?
- How much further will the BOJ raise rates, and will monetary tightening outpace inflation, risking contraction?
- Can the Takaichi administration maintain its fiscal stimulus ambitions without undermining market confidence or triggering currency instability?
- What is the timeline for restoring Japan’s fiscal consolidation (e.g., debt dependence, primary balance), and how will that affect credit ratings and borrowing terms internationally?
Supporting Notes
- Japan’s sovereign debt net supply is forecast to rise about 8% to roughly ¥65 trillion (~US$415 billion) in the fiscal year beginning April.
- The BOJ plans to reduce its monthly gross bond purchases to about ¥2.1 trillion, shrinking its bond holdings by ~¥46.5 trillion next fiscal year versus ~¥41.1 trillion in the current period.
- 10-year Japanese government bond yields climbed to about 2.13%, levels not seen since 1999.
- Policy rate has been raised to ~0.75%, its highest in roughly 30 years.
- Japan’s cabinet approved a record ¥122.3 trillion (~US$785 billion) budget for FY starting April 2026; although new bond issuance rises only slightly to ~¥29.6 trillion; debt servicing cost projected to rise ~10.8% to ~¥31.3 trillion.
- Japan’s national debt is more than twice its GDP, already one of the highest among developed economies.