David Scutt, FOREX.com APAC Market Analyst, examines how Japan’s fiscal, demographic and inflation pressures have driven a dramatic shift in its bond market with global implications.
Japan has not run a budget surplus since 1990, and the deficit is projected to remain around 2.5% of GDP this year. The debt-to-GDP ratio now stands at 237%, the highest among developed economies. Political uncertainty and demands for spending make deficit reduction harder to achieve. An ageing population compounds the challenge, shrinking the taxpayer base while boosting costs for pensions and healthcare, creating persistent fiscal strain.
Inflation in Japan has stayed above the Bank of Japan’s 2% target for more than three years. This forced a policy shift in June 2023, when the BOJ raised its yield curve control cap. “The move accelerated the climb in JGB yields across the curve”. The change marked the end of the ultra-loose policy era and signalled a reset in Japanese bond markets.
As the world’s second-largest bond market, movements in Japanese Government Bonds impact global funding costs. Higher JGB yields make Japanese bonds more attractive, reducing appetite for carry trades and keeping capital at home. This dynamic has contributed to upward pressure on yields in the US and Europe.
Markets are pricing further BOJ hikes, with about 1.5 moves expected by July next year. Normally, higher short rates would cap long-term yields by curbing growth, but in Japan’s case fiscal concerns may keep pushing yields higher. Scutt suggests that a lasting reset is underway, with fiscal strains, demographics and inflation ensuring continued pressure on the JGB curve.
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---- Written by Frederic Guetin, StoneX TV Producer>
---- Expert: David Scutt, FOREX.com APAC Market Analyst
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