Japan's large-scale economic stimulus plan exacerbates fiscal concerns, causing a significant decline in long-term government bond yields.

The long-term Japanese government bonds fell sharply on Monday, as concerns over the fiscal situation heated up again with the Japanese government expected to announce its first economic stimulus package as early as this week. Data showed that the yield on Japanese 20-year government bonds jumped to its highest level since 1999, with the yield on 30-year government bonds rising 5 basis points to 3.26% and the yield on 40-year government bonds rising 5.5 basis points to 3.6%. Traders are closely watching the actual spending data in Prime Minister Nao Tsuga's upcoming economic stimulus package to assess the risks of increased debt threatening market stability in Japan. While the Bank of Japan still plans to raise interest rates in the coming months, the GDP data released on Monday provided support for Tsuga's push for a large-scale stimulus plan. The data showed that Japan's GDP in the third quarter fell by an annual rate of 1.8%, the first negative growth in six quarters. Naoya Hasegawa, Chief Bond Strategist at Okada Securities, said, "Investors are cautious about the size of the Japanese government's economic stimulus plan, and the uncertainty surrounding its impact on bond issuance is putting pressure on long-term bonds." The Tsuga government is reportedly considering adding about 14 trillion yen (approximately $910 billion) to this year's budget, exceeding last year's 13.9 trillion yen, to provide funds for related expenditures. The larger spending scale underscores Tsuga's concept of "responsible and expansionary finances" and shows her willingness to rely more on fiscal policy to support economic growth. Goldman Sachs stated that as investors begin to worry that the stimulus scale that the Japanese government may introduce could be larger than expected, the fiscal risk premium in Japan is returning, putting pressure on long-term government bonds and the yen. The bank pointed out that the market is increasingly concerned that the Japanese government may abandon its "annual budget balance" commitment and long-term fiscal targets. The bank added, "Even if the final outcome is not as extreme as imagined, the market's sensitivity to fiscal issues has clearly increased, meaning that any path to eventual easing may be bumpy." In this situation, investors are increasingly concerned about the Japanese 20-year government bond auction scheduled for Wednesday. Miki Den, Senior Interest Rate Strategist at SMBC Nikko Securities, said, "After the 20-year government bond auction, I expect the yield curve to stop steepening, and the yield on 10-year bonds to fall below 1.7%. However, if the additional budget size exceeds 14 trillion yen, the yield curve may further steepen."