On Tuesday, July 15, 2025, the yield on Japan’s benchmark 10-year government bond briefly surged to 1.595 percent, marking its highest level since October 2008, a period shadowed by the global financial crisis triggered by the collapse of Lehman Brothers Holdings Inc. This notable increase reflects growing market concerns about Japan’s fiscal trajectory amid looming political uncertainties ahead of the Upper House election scheduled for July 20.
The rise in long-term interest rates has been driven largely by speculation that the ruling Liberal Democratic Party (LDP) and its coalition partner, the Komeito party, may face a weak performance in the election. Recent polls paint a grim picture for the coalition, with support for the LDP plummeting to 24 percent—their lowest since their return to power in 2012. This erosion of backing has intensified fears that the government’s ability to maintain fiscal discipline could falter, especially as opposition parties campaign vigorously on reducing the consumption tax rate to ease the burden of rising food prices.
Such tax cuts, while popular, would require substantial financial resources, potentially exacerbating Japan’s already significant budget deficit. The ruling coalition has pledged cash handouts to voters, but with the threat of losing its majority in the upper house, the government’s fiscal management strategy faces serious tests.
Market participants have reacted cautiously. Hideki Shibata, senior fixed-income and foreign exchange strategist at Tokai Tokyo Intelligence Laboratory Co., observed, "What we are seeing is more market participants receding to the sidelines and leaving the market vulnerable to selling rather than selling speculatively." This hesitancy is reflected in the bond market’s vulnerability, as investors weigh the risks of postponed fiscal consolidation and the impact of potential stimulus measures.
Finance Minister Katsunobu Kato addressed the situation at a press conference, assuring that the government will closely monitor market developments and maintain open dialogue with investors to manage debt policies effectively. He emphasized, "We will continue to make effort for appropriate fiscal management so the market will not lose confidence in government bonds." Despite these reassurances, the bond yield edged up by 0.025 percentage points from Monday’s close, underscoring persistent market unease.
The uptick in Japan’s bond yields also aligns with global trends. Long-term U.S. Treasury yields have been climbing, influenced by expectations of accelerating inflation driven by President Donald Trump’s imposition of higher tariffs. Trump’s 25 percent potential tariffs on Japan, following unsuccessful negotiations with Tokyo, have added pressure on Japanese assets, contributing to currency volatility and market jitters.
Lawrence McDonald, founder of the Bear Traps Report, highlighted this dynamic in a recent commentary, warning that Japan’s longstanding role as the "planet Earth’s bond yield anchor for decades" may be coming to an end. He cautioned, "When central bankers distort the true cost of capital over longer and longer periods of time, there’s a price to pay for this charade; it’s not free." McDonald’s remarks resonate amid synchronized stress across global bond markets, with UK long bond yields breaking through 2022 panic highs and French 30-year yields hitting 4.21 percent, their highest since 2011.
These developments unfold against broader concerns about commercial real estate debt, particularly in the United States, where approximately $5 trillion in commercial and multifamily mortgage debt issued between 2013 and 2021 at low coupons now trades at significant discounts. Meanwhile, U.S. 10-year Treasury yields remain above 4.43 percent as investors await critical inflation data that could influence Federal Reserve policy decisions.
Back in Japan, the political landscape is equally tense. The upcoming Upper House election represents a pivotal moment for Prime Minister Shigeru Ishiba’s minority government. His declining popularity and the coalition’s shaky standing raise the possibility that they may lose their majority, compelling them to seek support from smaller parties advocating for looser fiscal and monetary policies. Such a shift could accelerate fiscal spending, further pressuring bond yields, especially in the super-long maturity sector.
Currency markets have responded to these pressures. The Japanese yen weakened slightly, trading at 0.0068 against the U.S. dollar, while the Nikkei 225 index edged down by 0.015 percent to 39,453.90. The yen, often regarded as a safe-haven currency, has seen its value influenced by the Bank of Japan’s ultra-loose monetary policy over the past decade. This policy stance, which diverged markedly from other central banks like the U.S. Federal Reserve, contributed to yen depreciation. However, recent gradual unwinding of this policy and interest-rate cuts elsewhere have started to narrow the yield differential between Japanese and U.S. bonds, lending some support to the yen.
Still, the overall market environment remains fragile. Traders are bracing for the election outcomes that could reshape Japan’s fiscal and monetary policy landscape. The combination of political uncertainty, potential fiscal stimulus, and global inflationary pressures creates a complex backdrop for investors.
As the July 20 election draws near, all eyes will be on Japan’s political arena and financial markets. Will the ruling coalition manage to hold onto power and maintain fiscal discipline, or will a shift toward expanded spending and looser policies drive bond yields even higher? The answer will have profound implications not only for Japan’s economy but also for global financial markets, as the country’s government bonds have long served as a cornerstone of stability in an increasingly volatile world.
