Japan won’t experience a fiscal crisis anytime soon

Most of the recent increase in long-term bond yields appears to have been driven by higher expectations for short-term interest rates as well as reduced demand from traditional investors in long-dated JGBs. Fiscal concerns don’t seem to be playing a major role, which makes sense because Japan’s fiscal health is improving. Our base case is that long-term yields won’t rise much further and that Japan will avoid a fiscal crisis.

Given that Japan’s 10-year government bond yield has surpassed 2% amidst concerns over Japan’s fiscal health, we’re resending this Focus that was originally published in June 2025.

There have been two key developments since then. The first is that the budget deficit in 2024 narrowed to a 32-year low of 1.7% of GDP in 2024, a far cry from the 6.5% the IMF predicted as recently as mid-2024 but close to our own estimates. Based on our proprietary trackers of Japan’s government revenue and spending, we estimate that the shortfall narrowed further to just -0.2% in 2025, far smaller than the analyst consensus of 2.5%. Please email me if you’d like to get access to our trackers.

The second is that Sanae Takaichi has become Prime Minister and passed a large supplementary budget last autumn. Even so, we expect the budget deficit to only increase marginally this year and the ratio of public debt to GDP to keep falling rapidly.