Japanese bond yields are the highest in 40 years. The budget and a 'red flag' from PM Takaichi have markets nervous

Japan's Prime Minister Sanae Takaichi responds to questions from reporters at the Prime Minister's Office in Tokyo on May 25, 2026. Prime Minister Sanae Takaichi said on May 25 the government will compile a $19 billion supplementary budget to support households grappling with soaring everyday costs driven by the Iran war. (Photo by JIJI PRESS / AFP via Getty Images) / Japan OUT Str | Afp | Getty Images Japanese Prime Minister Sanae Takaichi is compiling a supplementary budget to help households with the cost of living, but it's also created skepticism about whether she can stick to her promises about debt issuance. The budget was largely in line with market expectations, at about 3 trillion yen ($19 billion), but comes as Japan still struggles with higher energy prices, rising subsidy costs, and a weak yen. The budget also marks a reversal from her earlier position that extra spending was not needed. She also said the total bond issuance for the calendar year of 2026 would remain unchanged from the original budget plan, according to Bloomberg. Takaichi has sought to dispel worries in the bond market, saying that the extra spending would be financed by issuing deficit-covering bonds. But the 10-year Japanese sovereign bond yield rose to 2.809% on May 20, its highest since 1996, after reports that the government may issue fresh debt to fund the extra budget. …