RECORD JGB yields are forcing Japan to rethink fiscal plans: Japan’s 30-year government bond yield surged another +5 basis points on Monday, to a record 4.24%, as investors grew increasingly concerned about rising debt issuance and inflation risks. At the same time, the 40-year yield jumped +6 basis points to near a record 4.32%. Meanwhile, speaking to parliament on Monday, Prime Minister Sanae Takaichi pledged to ‘control’ bond issuance and maintain fiscal sustainability while still pursuing large spending programs to support growth. The government is preparing a record spending budget and plans a 2-year cut in the consumption tax on food, raising further questions about how the resulting revenue shortfall will be financed. Japan’s public debt is already 204% of the size of its economy, while funding costs are rising as the Bank of Japan hikes rates, reduces bond purchases, and demand for JGBs remains fragile. Takaichi is signaling that Japan will not pursue unlimited deficit spending regardless of what happens to bond yields. If borrowing costs or market stress rise sharply, the government could scale back or adjust its spending and debt issuance. Bond market investors are forcing Japan’s fiscal policy to confront the cost of its debt.