The Bond Vigilantes Head to Tokyo
Surging long rates warn that Japan needs better economic policies.
By The Editorial Board
A monitor displays long-term interest rates in Tokyo. Jiji Press/EPA/ShutterstockHave the bond vigilantes finally landed in Tokyo?
The yield on Japan’s 40-year government bond on Tuesday rose above 4% for the first time since Tokyo started issuing that maturity in 2007.
Yields across the curve surged; the 10-year briefly touched 2.33%, its highest since 1999.
Some of this reflects global market unease about the rift between President Trump and Europe over Greenland.
But investors in Japan appear to be more worried about the snap election Prime Minister Sanae Takaichi has called for next month.
So-called fiscal expansion is a central element of her economic plan.
The election campaign will focus on her pledge to reduce the consumption tax for some purchases for two years, with a revenue loss of about $31 billion a year.
That might be worth doing, but it comes on top of a lot of other spending that definitely isn’t.
This includes Ms. Takaichi’s ¥18.3 trillion ($116 billion) “stimulus” package, approved in November.
That plan offered energy subsidies, cash handouts to households ostensibly to counter inflation, and industrial-policy subsidies in areas such as semiconductors and artificial intelligence.
Tokyo’s problem—and the real reason for the bond vigilantes to ride into town—is that none of this does anything to boost economic growth.
Japan has developed a habit of throwing cash hither and yon to no good effect other than to accumulate debt.
We count roughly 20 stimulus packages since 1992, in the form of “supplementary” budgets.
These include ¥98 trillion during the 1990s, spent on a combination of roads and bridges, social spending and bank bailouts.
In the 2000s, it was ¥42 trillion in government spending on cash handouts to households and various schemes to subsidize household purchases of big-ticket items.
In the 2010s, there was ¥111 trillion for reconstruction after the 2011 Fukushima earthquake and tsunami, a round of public-works spending, and a new batch of handouts (to offset an increase in the consumption tax, which goes to show someone in Tokyo still has a sense of humor).
So far this decade, the special-stimulus bill is running at some ¥387 trillion.
Much of that is pandemic-era spending, but it also includes Ms. Takaichi’s latest package.
None of this created much economic growth.
But it did amass debt equal to 250% of GDP, up from about 63% when the bubble burst in 1990.
That statistic is telling: If all these stimulus efforts had spurred economic activity, GDP growth would have outpaced the accumulation of debt.
Instead, debt service consumes one-quarter of the government budget—¥28 trillion ($178 billion) in fiscal 2025 for interest and redemptions combined.
Defense spending of ¥8.7 trillion is 7.5% of the budget, less than the ¥10.5 trillion Tokyo pays in interest on the debt.
Investors are right to wonder how these numbers can add up in the future, especially as the Bank of Japan raises its policy interest rate to suppress persistent inflation.
The economy needs a plan focused less on spending and more on reviving animal spirits.
Junichiro Koizumi made a start with his financial reforms in the early 2000s.
Shinzo Abe, a great fan of stimulus spending, at least also rolled out corporate-governance reforms and other measures to introduce greater market discipline.
The BOJ’s interest-rate increases may help by bankrupting some of Japan’s zombie companies that sop up resources with no hope of turning a profit.
But so far Ms. Takaichi is short of reform plans.
Tokyo’s gradual monetary normalization and its dire fiscal situation rank among the more serious threats to global financial stability at the moment.
Japan is an extreme case of a high-debt-low-growth policy model that infects most other Western economies.
How Tokyo does or doesn’t fix this will serve as a lesson—and perhaps a warning—the world over.
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