- The 30-year Japanese Government Bond (JGB) yield moved c.0.3% to a record high of 3.8% this week1
- This move followed PM Sanae Takaichi’s announcement of a further 5.8% increase in spending2
- Japan’s large cap stock market has outperformed the US, UK and Europe year to date, returning 3.4% at the time of writing1
Takaichi became Japan’s first female Prime Minister in October last year, assuming responsibility for overseeing the nation’s fiscal policy. Consistent with her campaign pledges, she outlined additional outlays in a supplementary budget toward the end of 2025 and has now proposed a further 5.8% increase in expenditure in the regular 2026 budget, which still awaits approval by the Diet2.
The magnitude of this expansionary fiscal stance has raised new concerns around the sustainability of government finances, with Japan’s debt-to-GDP ratio the highest among advanced economies at 236.7%3. This has contributed to upward pressure on government bond (JGB) yields. With debt-to-GDP ratios exceeding 100% in the United States, France, Italy, and Canada, Japan’s experience may serve as a cautionary example of how prolonged, seemingly unfunded, fiscal expansion can erode a government’s fiscal credibility and ultimately increase borrowing costs.
Japanese Government Bond Yields
Source: Capital Economics and London Stock Exchange Group, 2026
Affordability
While markets were quick to focus on proposed tax cuts, such as the suspension of the 8% sales tax on food and beverages, we see reassuring evidence suggesting that the sell-off at the long end of the curve may be overstated. Japan’s return to inflation (currently 2.1%³) has supported stronger nominal growth and, in turn, higher tax receipts, which are helping to reduce the debt-to-GDP ratio. JK Investments estimates that this ratio is now declining at a pace of approximately 6% per annum.
Moreover, the ownership composition of JGBs provides an additional stabilising force. The Bank of Japan holds approximately 50% of outstanding JGBs, while only around 12% are held outside the region, limiting the scope for sustained bond vigilante pressure. This stands in sharp contrast to US government debt, of which roughly $3 trillion, or about 10%⁴, is held by Europe, and 33.1% is owned by non-domestic investors⁵.
Source: JK Investments, December 2025
With interest rates still well below those of other developed economies (currently 0.75%³), Japan is uniquely positioned to borrow at a comparatively low cost and deploy capital into higher-yielding global assets. In addition, the country maintains substantial public and quasi-public asset pools to support its ageing population, alongside the world’s second-largest foreign exchange reserves5.
As discussed in our previous piece on Japan, these debt dynamics further reinforce the country’s distinctive economic micro-climate and have helped to rekindle investor interest in the region.
Bowmore Portfolios
We maintain only a negligible allocation to Japanese bonds across both government and corporate issuers, instead favouring UK debt for the majority of our fixed income exposure. Currently, 57.7% of the total fixed income allocation within the Core 5 portfolio is invested in UK assets, a positioning that eliminates currency risk and reflects our expectation of further interest rate cuts this year.
Back in October 2025 however, we made a rotation within our Japanese equity exposure, shifting towards a smaller cap, more domestically focused strategy. This allocation was selected to capture the benefits of a broadening corporate governance reform agenda, strengthening wage growth, and a recovering Yen. Since its inclusion in portfolios, the fund has delivered a return of 5.92%.
Source: Alpha Terminal, data as at 29/01/2026
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.
Sources:
1 AM Insights, 29/02/2026
2 Capital Economics, 2026
3 Trading Economics, 2026
4 Morningstar, 2026
5 JK Investments, 2026
6 Wavemaker, 2021
7 McKinsey & Co, 2017
8 CNBC, 2025
9 Reuters, 2025
10 Fortune Business Insights, 2025