Market volatility compounded by fiscal concerns has led to a record high in the yield spread between Japan's 30-year and 5-year government bonds since 2002.

Investors are demanding a higher premium for holding Japanese 30-year government bonds compared to 5-year government bonds, reaching the highest level in over 20 years. The increase is due to heightened global market volatility and concerns about Japan's fiscal situation driving up long-term Japanese government bond yields. According to calculations, the compound spread between the two reached about 193 basis points on Monday, the highest since May 2002. Amid pressure from turbulent global bond markets, fears about Japan's growing debt burden have escalated as speculation mounts that the Japanese government is preparing to introduce an additional budget earlier than usual this fiscal year to support the economy. While it is not uncommon for the Japanese government to seek additional budget allocations for expenditure, concerns about Japan's fiscal situation have been exacerbated by the government's consideration of cash handouts and consumer relief measures. Takahiro Otsuka, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities, said, "Expectations for a rate hike by the Bank of Japan are diminishing, causing short-term Japanese government bond yields to decline. At the same time, long-term Japanese government bond yields are rising due to reduced liquidity and expectations of fiscal expansion. This is causing the Japanese government bond yield curve to steepen." Speculation continues about the possibility of the Japanese government announcing an additional budget at some point, despite Finance Minister Katsunobu Kato denying this on Tuesday. Ryutaro Kimura, fixed income strategist at Axa Investment Managers, said, "Fiscal expansion is a medium to long-term issue, but the biggest concerns are the increase in volatility and decrease in liquidity." "However, there is some hope that U.S. bond yields are beginning to stabilize, which may help prevent an increase in Japanese long-term government bond yields." Some market participants suggest that President Trump's consideration of temporary exemptions for import tariffs on cars and components may help restore bets on the Bank of Japan's further normalization of monetary policy. Overnight index futures pricing shows a 51% likelihood of a rate hike by the Bank of Japan by the end of the year, up from 39% on last Friday.