Japan eyes 'bridging bonds' to fund investment schemes, party draft shows

By Tamiyuki Kihara and Leika Kihara

TOKYO - Japan's ruling party will propose issuing "bridging bonds" to fund flagship programmes aimed at boosting growth and economic security, a draft of its proposal showed on Thursday, an idea that underscores politicians' sensitivity to rising bond yields.

The government would consider including the idea in its medium-term fiscal blueprint due in July, which would be the first compiled by Prime Minister Sanae Takaichi, a government source familiar with the matter told Reuters.

Bridging bonds are used to cover temporary funding needs and are issued with guarantees on specific means to pay for redemption, allowing the government to argue that it is mindful of the need to keep Japan's fiscal house in order even as it boosts spending.

The idea, first reported by the Nikkei business daily, was included in the LDP proposal on Japan's growth strategy, according to the draft reviewed by Reuters.

The government should create a new investment framework, some of which can be funded by bridging bonds, the proposal said.

"For investment in areas particularly important from an economic security standpoint, the government should set aside a separate policy scheme with funding spanning several years," it said, adding that some of the funding could come from bridging bonds.

Chief Cabinet Secretary Minoru Kihara said the government was already issuing some bridging bonds to fund its spending, and aimed to continue to support efforts to rejuvenate the economy.

"We will strive to maintain market trust over Japan's sustainable fiscal policy by stably lowering government debt-to-GDP ratio," Kihara told a news conference on Thursday.

The idea underscores the administration's dilemma in trying to meet its pledge to focus on reflating the economy without fuelling a renewed bond market selloff driven by investor fears over Japan's worsening finances.

Japanese government bonds (JGB) briefly weakened on the news, before recouping ground on Thursday.

At twice the size of its economy, Japan's public debt is the largest among major economies. JGB yields have already been rising as the Bank of Japan gradually slows its huge bond buying as part of its policy normalisation.

Analysts said the impact on markets would depend on the size of expenditure funded by the bridging bonds, and on how the government would redeem them.

"Markets may take the idea as negative for Japan's fiscal discipline as the government may ramp up spending without solidifying the means to fund it," said Keisuke Tsuruta, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

FISCAL CHALLENGES

Concerns that Takaichi, an advocate of loose fiscal policy, could ramp up spending by stepping up debt issuance sent the benchmark 10-year JGB yield to a 30-year high last week.

Takaichi has announced a plan to compile an extra budget to subsidise fuel costs and help tackle cost-of-living pressures from the Middle East conflict.

But the size, around 3 trillion yen ($18.8 billion), was smaller than past extra budgets as the bond market rout forced the administration to alleviate concerns over huge debt.

Takaichi has laid out 17 strategic areas, such as semiconductors and shipbuilding, that her administration will target in expanding domestic investment as part of its growth strategy.

The key was how to fund the programmes with Japan's huge public debt and the premier's expansionary fiscal policy already putting markets on edge.

Since they are issued for temporary funding, bridging bonds would be excluded from the government's calculation of Japan's fiscal measurements such as its debt-to-GDP ratio.

A similar mechanism was used when the government issued climate transition bonds, which were designed to raise money for decarbonisation-related investment with repayment tied to future carbon pricing revenues.

The administration must also come up with ways to fund the temporary freeze of an 8% levy on food now under consideration, which would cost roughly 10 trillion yen, and an expected rise in defence spending.

($1 = 159.6400 yen)

(Reporting by Tamiyuki Kihara and Leika Kihara; additional reporting by Makiko Yamazaki; Editing by Lincoln Feast, Kate Mayberry and John Mair)

Copyright Reuters or USA Today Network via Reuters Connect.

This story was originally published May 28, 2026 at 2:04 AM.