BlockBeats News, August 19th. Recently, the Japanese government bond market has experienced a significant sell-off. On Tuesday, the yield on the Japanese 10-year government bond rose to 2.945%, reaching its highest level in nearly 30 years since the mid-1990s. On Wednesday, it remained around 2.89%.

The market is concerned that if the 10-year JGB yield surpasses 3%, it will be significantly higher than the Japanese government's fiscal assumptions, further raising debt financing costs and putting pressure on Prime Minister Sanae Takaichi's expansionary fiscal policy.

The Japanese government has currently allocated around 31 trillion yen for debt repayment. If the yield continues to rise, future debt serving costs could increase significantly. The Ministry of Finance predicts that by the fiscal year 2029, with the 10-year JGB yield at 3.6%, Japan's annual debt serving costs could rise to 41 trillion yen.

At the same time, the Takaichi administration plans to stimulate the economy through tax cuts and investments, but policies such as a reduction in the consumption tax have led to a decrease in fiscal revenues. The market is concerned that the government may further expand debt issuance, sparking debates within the ruling party over fiscal discipline.

Facing inflationary pressures and the risk of yen depreciation, expectations of a rate hike by the Bank of Japan are rising. Market data shows that traders expect the BOJ to raise rates by two more 25-basis-point hikes around January next year, potentially pushing the policy rate to 1.5%.

The former BOJ Executive Director, Hideo Amamiya, stated that the endpoint of this rate hike cycle could be around 1.75%; some analysts even believe that the final rate level could be close to 2%.

The market is also focusing on the 2027 BOJ personnel transition window. Observers of the BOJ believe that as members of the policy committee supporting rate hikes gradually retire in the summer of 2027, the BOJ may wish to complete major rate hikes before then to avoid future policy committee shifts affecting the tightening process.

Currently, the Japanese government and the BOJ are facing a dilemma in dealing with government bond pressures. On the one hand, fiscal expansion may further boost inflation and bond yields; on the other hand, if the BOJ significantly intervenes in the bond market with large-scale purchases, it may undermine the credibility of its tightening policy.