The UK now pays less on its debt than its Japanese peers, the latest sign investors are betting on further interest-rate cuts to stave off a deep recession.
The yield on the UK’s two-year bonds declined to an all-time low of minus 0.129%, inverting the spread between the nations’ securities for the first time on record, based on generic benchmark rates. 
The gaps on five- and 30-year bonds aren’t far off zero.
That comes after UK growth figures for May missed estimates on Tuesday, showing the economy’s struggle to recover from the coronavirus lockdown and driving investors into havens such as gilts. Meanwhile, shorter-dated Japanese bonds have been backstopped by the country’s central bank, keeping yields steady.
“Unlike Japan, we don’t really know where the bottom is for GBP rates,” said Antoine Bouvet, a rates strategist at ING Group NV. 
“Granted we are still some months away from a potential decision to slash interest rates below zero but if the eurozone or Switzerland is the template, then there is potential for GBP rates to go much lower than their JPY counterparts.”
The Office for Budget Responsibility sees the nation’s budget deficit widening to as much as 21% of gross domestic product, according to a report published on Tuesday. 
The economy may shrink by at least 10% this year, and as much as 14.3% if the OBR’s worst-case scenario pans out.
The moves show that European debt markets may be undergoing “Japanification,” a world of low yields, tepid inflation and little volatility. 
Some bond traders are speculating that the Bank of England could also follow its Japanese equivalent in trying to limit borrowing costs via so called yield-curve control.
“This development signifies that while Japan has long been at the vanguard of unconventional policy making, it has been a harbinger of things to come rather than an outlier,” said Richard McGuire, the head of rates strategy at Rabobank in London. “We have argued for some time that Japanification has been underway in the West.”
Other market indicators have also flashed signals that the BoE could follow Japan’s crisis policy making. Rate futures tied to three-month sterling Libor traded above 100 for the first time last week, hinting at negative rates by March 2022. 
A day earlier, the rate banks use to lend to each other dropped below the BoE’s benchmark, a move that often precedes a rate cut.
BoE governor Andrew Bailey fuelled the debate further by warning lenders last month of the challenges negative interest rates would bring. He addressed lawmakers from the UK’s ruling Conservative Party on Wednesday, where he asked about the consequences.