Japan’s 10-year bond yield hits highest since 1996

Japan's 10-year government bond yield surged to its highest level in nearly 30 years on Thursday, as investors grow increasingly uneasy about the country's fiscal trajectory under Prime Minister Sanae Takaichi and brace for further interest rate increases from the Bank of Japan.

Bond Market Under Pressure

The benchmark 10-year yield reached approximately 2.81% on July 3, a level not seen since October 1996, according to market data. The spike comes atop a broader selloff in Japanese government bonds that has intensified since the BOJ raised its policy rate to 1% on June 16 — the highest since 1995 — in a 7-1 vote. The 30-year yield held near 4.03%, while the spread between Japan's 10-year and 2-year bonds hit a record 140 basis points on July 2.cnbc+5

BNP Paribas raised its forecast for the BOJ's terminal interest rate to 2.5%, with senior economist Kono projecting the policy rate would reach 1.25% by year-end and 2.0% by the end of 2027. A summary of the BOJ's June meeting, published on June 24, showed several board members calling for faster rate hikes to bring policy toward neutral levels, according to Reuters.reuters+2

Takaichi's Fiscal Expansion Fuels Concerns

The selling pressure in longer-dated bonds reflects growing alarm over Prime Minister Takaichi's spending agenda. Bloomberg reported on June 30 that Japan's super-long bond yields climbed sharply as her fiscal expansion plans deepened market anxiety. CNBC reported in late May that Takaichi's supplementary budget — estimated at around 3 trillion yen — raised doubts about her commitment to debt discipline, with the additional spending financed through deficit-covering bonds.cnbc+1

According to an analysis by the CME Group ↗ 2.42%, Takaichi's platform envisions boosting spending by 21.3 trillion yen, roughly 3.7% of GDP, focused on defense, AI, and semiconductors, potentially pushing Japan's budget deficit from 2.5% of GDP to around 6% in the fiscal year ending March 2027.cmegroup

Corporate Borrowers Seek Alternatives

Rising borrowing costs have pushed Japanese companies toward convertible bonds as a cheaper financing alternative. Kawasaki Heavy Industries announced on July 2 a combined offering of new shares and zero-coupon convertible bonds totaling roughly 101 billion yen to fund hydrogen infrastructure and AI development. Earlier this year, Nippon Steel issued 600 billion yen in convertible bonds — the largest such deal in Japanese corporate history — to refinance its acquisition of U.S. Steel, according to Reuters.reuters+1

The BOJ has signaled it will continue reducing government bond purchases by 200 billion yen per quarter while maintaining monthly purchases of 2 trillion yen through April 2027, a stance that removes a key source of demand from the market at a time when fiscal concerns are already weighing on prices.cnbc