The sharp rise in Japanese government bond (JGB) yields has begun to reflect over-exaggerated fears of higher government spending, according to Asset Management One, one of Japan’s biggest asset managers.
The yield on the 30-year bond has risen to 3.1% on July 29 2025, up from 2.2% on July 29 2024: as of the market’s close on July 29 2025, the 10-year average bond yield stood at 1.5%.
Yields have remained volatile as investors have speculated that the prime minister Shigeru Ishiba may resign, and the Liberal Democratic Party may have to make policy compromises with opposition parties that increase government spending.
On July 20 2025, the ruling Liberal Democratic Party (LDP) lost its majority in the House of Councillors, Japan’s upper legislative chamber, but, by a lower margin than feared) creating political uncertainty.
But Oleg Kapinos, head of global distribution strategy at Asset Management One, said concerns over government spending have been overstated.
Instead, predicted increases in spending should be offset by continued economic growth. Government debt is expected to reduce to 170% of GDP in the next decade from 210% of GDP in 2024.
“If economic growth continues then the impact of a moderate increase in Government spending and lowering of consumption tax rates on the deficit will be limited,” said Kapinos.
“Whilst political uncertainty has led to increased yields – that increase in yields means investors are being much more adequately compensated for those political risks,” he added. “The Bank of Japan also has a number of tools at its disposal to ensure yields are kept under control.”
“Additionally, If the inflation rate stays at current levels, the budget deficit will continue falling as a proportion of GDP.”
Kapinos said the Bank of Japan and ministry of finance can undertake several measures to ensure rising JGB yields remain stable.
These include: reducing quantitative tightening, reducing issuance of long-term bonds to control the supply-side effect on price, and reducing the supply of longer-term bonds would help compensate for lower demand
Additionally, several factors are likely to keep bond yields at a sustainable level over the long term, including: delaying reductions to consumptiontax rates, therefore maintaining tax revenue and reducing the risk of overspending, and put targets in place for local and national governments to reach a primary balance surplus by the end of the 2026 financial year
“It is possible that bond yields will continue to rise over the short term. However the growth outlook for the Japanese economy remains strong, which should keep the deficit under control and keep the supply of new JGBs under control,” added Kapinos. “Combined with the Bank’s monetary strategies, any short-term increases in JGB yields can be effectively managed.”
“We still expect interest rates to be raised again in early 2026. The underlying case for keeping Japanese inflation under control remains intact,” Kapinos concluded.
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