If Rachel Reeves was thinking she could do a Japan and greatly increase state debt without incurring an increase in interest charges, she needs to think again. The new Japanese PM has soon encountered bond market resistance to the idea that she can spend and borrow more given the elevated state of Japan government indebtedness. The Japanese PM who likes to draw a parallel between herself and Margaret Thatcher clearly did not get the memo that said that Margaret was keen to control spending and sell state assets to reduce risks and raise money.
The Japanese bond market has been spooked by the new Prime Minister wishing to put through further fiscal stimulus measures. Japan’s state debt is a massive 1324 trillion yen ( £6,400 bn) , more than double the UK’s. For years this has been affordable as for much of that time Japan has been able to borrow at rates below 1%. Now alarmed by both the enormous stock of debt and by future high borrowing requirements, the markets have put the cost of 10 year borrowing for the state up to almost 2%. As the old debt matures the government has to repay it and replace it with new borrowing. This is now going to be at much higher interest cost, placing more strains on the Japanese budget and taxpayers.
Current debt interest costs are around 10 tn yen a year (£48bn), a manageable cost. Were the whole 1324 tn yen to be refinanced at 2% in due course that would be an interest cost of 26 tn yen (£125bn), more than two and half times the current level. If this takes place at the same time as the government seeks to borrow a larger share of its current budget each year the compound effects become more serious. The Japanese bond market will experience big demands and further strains. The pressure is on the Prime Minister to reduce her additional demands to spend more and to cancel tax cuts to avoid making a difficult situation worse.
The absolute level of debt interest is still modest compared with say the UK. With the Uk now facing much higher interest rates, in excess of 4%, the debt service costs in the UK have already exceeded £105 bn and are on course for £131 bn by the end of the decade according to the official forecasts. The UK over the next five years on current government plans needs to raise £628bn for additional spending and £675 bn to replace retiring debt. Both these fund raisings will add to the interest burden. That is why UK 10 year rates are at 4.4%.
I have highlighted the refinancing. Whilst this does not add to the already high stock of state debt, it does allow the markets to charge the government more for debt it already holds as the price of new borrowing to repay the old debt. Rachel Reeves is like someone with a large mortgage that they want to refinance and at the same time want to take out a big car loan for a new car. The bank manager considers whether you can afford both, and if willing to allow it charges more for both to reflect the greater risks from such high borrowings. The bank may say defer the car or buy a cheaper one.
The bond vigilantes moving in on Japan are not helpful to Rachel Reeves position. Some will see that with considerably less debt than Japan the UK pays considerably more interest already, and may be forced to pay yet more as the Japanese free ride in world debt markets comes to an expensive end.
December 6, 2025
Good morning.
It is far worse for the UK than it is for Japan for, Japan has some of the largest Sovereign Wealth Funds in the world. So I am surprised that :
a) the Japanese government has to borrow from the Bond Markets, and
b) the Bond Markets have reacted in the way they have.
What concerns me most both about our economy is, the ability to pay our bills and the endless ability of politicians to inflict harm upon harm on the nation. It is as if they want it to fail which, I believe they all do.
On a slightly different topic I saw in the budget the proposal for road pricing. I have said on this site for something that, it was ,my belief that the government intend on selling off our road infrastructure. To do this they must first monetise it. Once then it is both shown to work and wealth can be extracted from it, it will be sold off.
Mark my words.
Reply Unlikely the government will sell the roads. So far the plan is a kind of road pricing for electric cars as a surrogate tax. It is more likely they would put this tax up on electric cars after introduction at a modest level and even add a charge to overtaxed petrol car users.