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Morning Edition · Monday, October 19, 2026Published at 1:11 AM EDT · New York
Takaichi declines to rule out new government bonds to pay for Japan's food tax cut
The prime minister told the upper house budget committee she aims to strengthen confidence in the yen, after earlier pledging no special deficit bonds and after the 30-year yield rose above 4.2% this month.
Prime Minister Sanae Takaichi did not rule out issuing government bonds to fund her tax cut, Jiji Press reported on Monday, from a session of the upper house budget committee. The headline reads, in translation: "Takaichi does not reject government bonds as funding for tax cut, aims to raise confidence in the yen". Earlier in the session she had told the upper house plenary that her government would fund the food consumption-tax cut "without relying on special deficit bonds, so as to win market confidence", through reviews of spending and revenue. The cut is estimated to cost about 5 trillion yen a year.
The bond market has already reacted to her fiscal plans. Japan's 30-year government bond yield rose to 4.235% in early October, ahead of her policy speech. She then told investors to "rest assured", and said the government may review spending if yields move sharply. The 10-year yield eased to 2.90% on Monday, 1.24 percentage points higher than a year ago.
Her political position has weakened. Kommersant, citing Bloomberg, reported that polls show her support falling after a cabinet member resigned over a scandal. On Sunday, Hiroshi Kajiyama, chair of the Liberal Democratic Party's General Council, made a ritual cash offering at Yasukuni Shrine on her behalf, and a second cabinet minister visited the shrine during its autumn festival. Beijing and Seoul have long protested such gestures.
In the original Japanese wording, the shift is small but real. Two weeks ago the prime minister excluded deficit bonds, and now she declines to exclude them. Investors who hold long-dated Japanese debt would have to fund a deficit-financed tax cut at a time when the Bank of Japan has been reducing its bond purchases.
Part of a tracked trend
The Long-End Revolt
Governments will keep reaching for balance-sheet tools to suppress long-term yields, and bond markets will keep repricing duration higher anyway, so each intervention transfers demand into scarce assets instead of lowering borrowing costs.
What this means
The mechanism is term premium, the extra yield investors demand for holding long-dated debt. Unfunded tax cuts add supply at the long end of the Japanese government bond (JGB) market at a time when the Bank of Japan is buying less. That pushes 30-year yields up and puts pressure on life insurers and pension funds that hold long JGBs. It also weighs on the yen through the fiscal-credibility channel, even though higher yields would normally support the currency. A weaker prime minister has less room to cut spending to offset the tax cut, because her coalition partners and party factions resist cuts more when her ratings fall. The precedent is the United Kingdom in September 2022. Unfunded tax cuts triggered a gilt sell-off, forced the Bank of England into emergency bond purchases, and ended Liz Truss's premiership within weeks. Japan's domestic investor base makes a run of that speed less likely. The likelier outcome is that Tokyo funds part of the first year with bonds while promising later offsets, and that pressure on the 30-year yield returns within months. The desk's read is wrong if the government publishes a funding plan with spending cuts that cover the cost and the 30-year yield falls back below its early-October level.
What to watch
- The next 30-year JGB auction. Weak demand at the auction would show domestic institutions refusing to absorb more long-dated supply at current yields.
- Whether the Bank of Japan slows the reduction of its bond purchases. A slowdown would show the central bank absorbing fiscal risk on the government's behalf.
- Chinese and South Korean responses to the Yasukuni offering. A diplomatic response with trade measures attached would add a political risk premium to Japanese exporters.
Observations to monitor, not financial advice.
Synthesized from: Jiji Press · Kommersant · The Japan Times
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