With 30 years of high return on Japanese debt, the market is alert to the worsening of Japan's debt cycle

On 8 July, the continued depreciation of the yen added to a large long-term fiscal spending programme, placing global investors in high alert to the pressure on the Japanese Government to service its debt, with the overall cost of domestic financing rising significantly. This year ' s national debt has continued to suffer from large-scale sales, rising to over 2.85 per cent in the base decade, the highest level in three decades since 1996. The market generally attributed the fall in long-term debt on this round to a 14-year, $2.3 trillion fiscal expansion programme launched by Prime Minister Sanae Takaichi. In addition to this, the market’s questioning of the policy tempo of the Central Bank of Japan also suppresses debt prices: the Central Bank of Japan raised the policy interest rate to 1 per cent last month, and investors fear that the Central Bank’s tightening pace will be slow, and inflation will exceed the official regulatory target of 2 per cent. Alex Everett, the director of investment in Ambon, analyses that the Central Bank of Japan is conservative about the subsequent increase in interest rates, that the yen has been weak for a long time, and that the market’s pessimistic expectations of fiscal sustainability have been compounded by a triple-profit co-optation of downward pressure on long-term national debt. Market concerns about the risk of forward debt are directly reflected in term spreads: the 10-year yield premium relative to the two-year national debt expanded from less than one percentage point in April to the current 1.4 percentage point. In the same period, the long-term spreads were even and even narrow, highlighting the independence of the Japanese debt market。