Japan's central bank is now under pressure as a surge in government bond yields threatens to normalize its monetary policy.
JGB yields continue to rise to their highest levels in more than a decade. On Thursday, the 10-year bond yield hit 1.917%, the highest since 2007. The 20-year bond rose to 2.936%, the highest since 1999, while the 30-year yield extended its record rise to 3.436%.
The sharp rise comes after Japan ends its yield curve control program in March 2024, which previously capped the 10-year bond yield at around 1%.
The move is part of a policy normalization process that also ends the world's last era of negative interest rates.
However, normalization is now a challenge. Japan is facing inflation that has remained above the 2% target for 43 consecutive months, making the surge in bond yields even more worrisome.
If the Bank of Japan continues to raise rates, it risks pushing bond yields higher and slowing the already sluggish economy.
But if the BOJ eases policy again or revives the YCC, the yen could weaken and increase imported inflation that is already weighing on consumers.
High bond yields also push up the cost of government borrowing. Japan now has the world’s highest debt-to-GDP ratio, around 230%, according to the IMF.
The situation is becoming more sensitive as the government plans its biggest stimulus package since the pandemic to support the economy and tackle rising living costs.
The government is expected to issue 11.7 trillion yen in new debt to finance a supplementary budget under Prime Minister Sanae Takaichi, an amount 1.7 times larger than the issuance under former PM Shigeru Ishiba in 2024.
The increase highlights the huge challenges of balancing fiscal stimulus with the sustainability of the country’s debt.
