Japanese Government bond market is very liquid and offers long tenors (up to 40 years). Government bonds are a major source for refinancing public debt and also public spending programs of the government. Japanese Government bonds are abbreviated as JGB.
On the buy-side of this bonds mainly life insurance companies have an appetite for long term government bonds to match their long term liabilities. This explains the relatively stable absorbing mechanism even for large volumes on newly issued JGB's.
It also explains why a downgrading of long-term government issues would not increase the paid interest on those bonds, because the liabilities would less. Asset and liabilities of the life insurers would move in the same direction. A significant change would only happen if the life insurers would invest more overseas, but with the few foreign insurers there is not much pressure to be seen and even then the term matching without taking to much foreign exchange risk is most important.
Pressure from deteriorating credit grades would be more direct in the foreign exchange rates. A devaluation would be the logical consequence at least from a longer term perspective. Even not now seen in the interest rate curve, but it could be possible that also the five to ten year rates go up much quicker to 2%. This would happen in case the corporate bond markets really starts to develop as a market in which bonds are much more frequently traded and prices are much more transparent. First step would be that the prices would be at least easily available for private and investor clients.
Current JGB 10-year yield: