Japan Bond Market Sends Warning Signals on Rising Costs

Japan's bond market is sending warning signals as the country pursues fiscal expansion. The 30-year bond yield has risen significantly, and investors are reassessing the long-term price of carrying Japanese fiscal and inflation risk.

The Ministry of Finance reported that Japan's public debt remains above 200% of GDP, but the IMF estimates that the effective interest rate on existing public debt was only around 0.7% last year.

While the Bank of Japan (BOJ) controls the overnight policy rate, it does not directly control the 30-year yield. The BOJ's expected hike to 1.25% is significant, but the bigger question is what comes after it.

Takaichi's growth strategy aims to increase productive capacity in sectors such as AI, semiconductors, energy, and advanced technology. If successful, this could lift productivity, wages, and nominal GDP, making Japan's debt burden easier to manage.