TOKYO - A spike in Japanese government bond yields threatens to derail Prime Minister Sanae Takaichi's growth strategy less than a year after she vowed aggressive fiscal stimulus to spur economy.
The yield on the benchmark 10-year Japanese government bond reached the 3 percent mark for the first time in 30 years on Tuesday as investors became increasingly worried about the outlook for Japan's fiscal health under Takaichi's economic management.
Bonds have come under greater selling pressure recently as investors begin factoring in the risk that her tax cut and investment plans could fail and lead to heftier government debt loads.
Bond prices and yields move inversely. Higher bond yields mean more interest payments by the government, which expects its debt to rise to 1,145 trillion yen ($7.2 trillion) at the end of March 2027.
Japan's debt-servicing costs are likely to increase 17.1 percent to a record 36.64 trillion yen in the next fiscal year, as the Finance Ministry plans to assume a 3.8 percent rate for calculating interest payments for fiscal 2027, up from the 3.0 percent assumed rate for the current fiscal year.
"The market has recently become quite sensitive about the outlook for fiscal policy," Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, said.
"In that case, I don't think (Takaichi) will be able to easily carry out the bold fiscal spending she has advocated" at least in the short to medium term, he said.
The U.S.-Israel strikes on Iran in February initially rekindled fears of inflation, sending bond yields higher along with oil product prices.
Market concerns over Japan's fiscal conditions grew further in June when the Takaichi government released the draft of its first economic and fiscal policy guidelines. They center on a combined 370 trillion yen's worth of public and private sector investment by fiscal 2040 but it is unclear how much of that amount the government will cover.
The investment will focus on 17 designated fields, such as artificial intelligence, semiconductors and shipbuilding to lead economic growth.
Takaichi also decided in late July to cut the consumption tax rate on food and beverages to 1 percent from the current 8 percent for two years starting next April to help consumers reeling from inflation.
But she has not outlined specific measures to cover the expected tax revenue shortfall or to fund the investment plan, leaving investors speculating that the government could increase bond issuance, a move that would worsen its fiscal health.
Under what she terms her "responsible and proactive fiscal policy," Takaichi shifted from single-year budget austerity to multiyear investments. She aims to boost tax revenues along with economic growth through generous fiscal spending and steadily lower the ratio of the government's debt to gross domestic product.
But, unconvinced by her plans, investors continue to reduce their bond holdings.
"Rising (bond yields) will lead to a higher cost of financing and the risk of partially offsetting the effect of the investment support by the government, making its (growth) impact smaller," said Yasunari Tanaka, a researcher at Mitsubishi Research Institute.
"If the government's additional investment spending does not translate into growth, it would not lead to an increase in tax revenues and would have a negative impact on (state) finances," Tanaka said.
Japan's debt to GDP ratio is projected to stand at 204.4 percent in 2026, far higher than 125.8 percent for the United States, 118.4 percent for France, 103.6 percent for Britain and 64.6 percent for Germany, according to the International Monetary Fund's estimates.
Bond yield increases raise borrowing costs for companies and could dent appetitive for investment, thus thwarting Takaichi's growth investment plans, economists say.
A recent survey by Mitsubishi Research showed 28 percent of companies see "stable interest rates and financing costs" as necessary for growth. A separate survey by the research company found 33 percent of big companies cited rises in interest rates and changes in the environment surrounding fundraising as a downside risk to growth.
