"I think we are almost through with the current bull run. Discussions about a supplementary budget will gradually seep into the market, raising concerns over the nation's fiscal status and the possibility of 10-year bond issue increases," said Yasunari Ueno, chief market economist at Fuji Securities.

With interest rates near zero, Japanese pensioners and others highly dependent on interest income have borne the brunt of policies to reflate the economy.

But rather than spend cash, more Japanese households have chosen to switchto higher-yielding financial instruments amid the current low interest rate environment, the most recent Bank of Japan (BOJ) survey on private savings and consumption showed.

Similarly, institutional investors have been pouring cash into the stock and bond markets as they seek higher returns. Bond analysts expect this bullish sentiment to remain until mid-June but say the mood could then change.

The market consensus holds that the government will craft a full-scale supplementary budget of anywhere between five and 10 trillion yen ($41 and $82 billion) this autumn.

Expectations of a supplementary budget of around 10 trillion yen will likely push up the yield on the key 10-year bond to the two per cent range by late summer, Fuji's Ueno said. Others see the bond yield rising to slightly under two percent by that time, from around 1.37 per cent now.

The bond market has also been supported in large part by perceptions that monetary authorities will take steps to prevent sharp rises in bond yields, as thiscould choke off any recovery.

But neither are monetary authorities interested in allowing bond yields to tumble sharply lower, partly out of worries that it would cause further yen weakness.

Top financial diplomat Eisuke Sakakibara said in a recent newspaper interview that the bond yield trough of 0.6 per cent hit last year was abnormally low and had reached crisis levels, while the recent level of about 1.5 per cent was more normal.

Fuji's Ueno is sceptical about whether authorities would act to stem an upswing in the bond yield. "There is no way to control the markets. If the markets think...monetary authorities will stop yields from rising, bonds will be sold off when they find out monetary authorities are doing nothing," he said.

"Markets have been deluded into believing that the issuance of five-year interest-bearing bonds and other measures would somehow offset future bond oversupply and rises in bond yields," a trader at a major Japanese brokerage said.

The problem for monetary authorities isvolatility, not levels, said Naomi Hasegawa, senior economist at Tokyo-Mitsubishi Securities.

"It's difficult for both investors seeking returns and for borrowers of funds when bond yields are bouncing all over the place. Volatility in bond yields has remained extremely high despite little change in economic fundamentals," she said.

Analysts also point to the following risks for the JGB market: