Japan's Borrowing Costs Hit 30-Year High as Yen Weakness Deepens

Japan's borrowing costs have reached a 30-year high as traders bet that the Bank of Japan will raise interest rates to stabilize the yen. The country's 10-year bond yield rose by more than 0.05 percentage points to 2.93%, its highest since 1996. This rise in yields will increase borrowing costs for Prime Minister Sanae Takaichi, who is ramping up spending and cutting taxes to boost the economy.

The yen's weakness has become a pressing concern, making it harder for Japan to raise spending or cut taxes. Economic growth unexpectedly slowed to 0.3% in the three months to June 30, kept afloat only by a 2.6% surge in government spending. The Bank of Japan may need to raise interest rates despite slowing economic growth due to the risk of faster inflation and global market instability.

Traders are predicting another rate hike in September, which could further drive up borrowing costs for the Japanese government. This comes as the country's debt-to-GDP ratio remains high at 249%, barely shifted since its peak during the Covid-19 pandemic. Experts warn that a low-level debt crisis is already underway.