TOKYO — Prime Minister Sanae Takaichi is attempting to reassure global investors as Japan faces mounting pressure from financial markets over the government’s 18.3 trillion yen ($137 billion) stimulus package, much of which is set to be funded through additional borrowing.
The warning signs emerged during a November 17 meeting at the prime minister’s residence, when Finance Minister Satsuki Katayama presented a chart showing accelerated selling of Japanese government bonds — a move that pushed long-term borrowing costs to their highest level since 2007. According to a person familiar with the exchange, Takaichi’s expression “turned serious,” with concerns deepening around both the weak yen and declining bond prices.
Japan’s 10-year bond yield has climbed 25.5 basis points in four weeks, the sharpest rise in almost three years, creating turbulence that has already spilled over into global markets. The situation is especially sensitive for Japan, the most heavily indebted developed nation, with public debt exceeding 1.3 quadrillion yen ($8.5 trillion).
Avoiding a “Truss Shock”
Facing comparisons to the UK’s 2022 market upheaval under former Prime Minister Liz Truss, Takaichi has publicly dismissed the possibility of a similar crisis in Japan. She has softened her earlier resistance to monetary tightening, pledged to limit extra borrowing, and unveiled new policies aimed at reducing wasteful government spending.
Still, analysts warn that the stakes are high.
“If growth doesn’t materialize, the only thing left will be an enormous amount of government debt,” said Toshinobu Chiba, fund manager at Simplex Asset Management.
The Bond-Buyer Dilemma
Japan’s massive debt issuance raises a fundamental question: who will buy all these bonds?
Demand from domestic banks and insurers has been shrinking, and the Bank of Japan has reduced its own purchases, leaving more supply for private investors to absorb. Bank of America estimates that net supply of JGBs will jump by nearly 11 trillion yen in 2026.
“We’ve still got more supply to absorb and Japan isn’t the only country spending aggressively,” said Sally Greig of Baillie Gifford.
Some dealers report a small rise in short positions in Japanese bonds, though the bigger pressure appears to be a lack of new buyers rather than heavy selling.
Yen Under Pressure
The markets are also testing Japan through its currency. Since Takaichi took office in early October, the yen has fallen about 5% to roughly 155 per dollar, despite the government issuing increasingly sharp warnings about intervention.
“There would definitely be interest in shorting the yen if it moves between 153 and 154,” said Patrick Law, head of APAC FICC trading at Bank of America.
Not all outlooks are bearish. Morgan Stanley forecasts the yen strengthening to 140 per dollar in the first half of 2026, arguing that rising yields reflect a healthier long-term reflation.
Market Waiting for Clarity
Analysts say that domestic buyers — pensions, banks, and institutional investors — still have the capacity to purchase Japanese government bonds. But confidence depends heavily on the government providing clear and transparent details on its issuance plans.
“Until this is clarified, it will remain difficult for investors to buy JGBs aggressively,” said Daiki Hayashi of J.P. Morgan.