Japan Bond Yields Surge on Fiscal Expansion Fears; Korean Rates Follow

Japan's bond market reacted swiftly with rising yields after the ruling Liberal Democratic Party secured a landslide victory in the House of Representatives election, having pledged aggressive fiscal expansion.

The 10-year Japanese government bond yield rose 0.065 percentage points to 2.290% on July 9 in Tokyo trading, while the newly issued 5-year bond yield hit a record high of 1.735%. Markets anticipate increased government bond issuance and consequent price weakness as the government pursues fiscal stimulus.

The LDP captured 316 of 465 lower house seats, exceeding the 310 required to propose constitutional amendments. Combined with coalition partner Nippon Ishin no Kai, the ruling bloc holds 352 seats.

The Takaichi cabinet appears willing to issue deficit-financing bonds despite Japan's debt-to-GDP ratio of 229%—far exceeding Italy's 136%, the highest among other G7 nations. Last year's supplementary budget of 18.3 trillion yen (approximately 170 trillion won) was the largest since the COVID-19 pandemic, with 64% financed through bond issuance.

"What I wanted voters to judge was my responsible, proactive fiscal policy that marks a major shift in economic and fiscal direction," Prime Minister Sanae Takaichi told NHK on July 8. "I will firmly pursue crisis management investment and growth investment."

Japanese equities rallied on expectations of accelerated "Sanaenomics," with the Nikkei breaching 57,000 intraday for the first time. Approximately 80% of stocks on the Tokyo Stock Exchange Prime Market advanced, led by AI, semiconductor, defense, and energy shares. JP Morgan raised its year-end Nikkei target from 60,000 to 61,000.

The yen weakened modestly to 156.59 per dollar, down 0.41%, after Japanese currency officials issued warnings for a second consecutive day. Vice Finance Minister for International Affairs Atsushi Mimura said authorities are "watching market developments with heightened vigilance."

Korean bond markets also showed caution. The 3-year Korean Treasury bond yield rose 3.4 basis points to 3.27%, while the 10-year yield climbed 4.4 basis points to 3.75%. U.S. 10-year Treasury yields also increased 3.3 basis points.

"Japan's bond market has significant influence on global bond yields," a financial investment industry official said. "Investors concerned about medium- to long-term upward pressure from Japan's deficit bond issuance sold some holdings at higher yields."

Seo Sang-young, researcher at Mirae Asset Securities, warned that surging Japanese yields could trigger U.S. Treasury yield spikes, adding volatility to global equity markets. "Global funds adjusting Asia allocations may shift capital toward Japan, whereas recently Korea has seen more inflows," he said.