Japan's long-term interest rates have risen to 2.9% for the first time in 30 years. Renewed tensions in the Middle East have driven up international oil prices, while the yen has fallen to around 162 yen per dollar, heightening inflation concerns. Additionally, worries about fiscal deterioration due to the aggressive spending policies of the administration led by Sanae Takaichi and speculation that the Bank of Japan (BOJ) may delay interest rate hikes have compounded these issues. There are fears that rising rates could burden an economy accustomed to ultra-low interest rates.
The Nikkei reported on July 9 that the yield on newly issued 10-year government bonds, a key indicator of long-term interest rates, briefly rose by 0.035 percentage points to 2.900% during trading in Tokyo, marking the highest level since September 1996. This increase has now persisted for five consecutive trading days. The yield later moderated to the high 2.8% range in the afternoon. A rise in interest rates typically indicates a decline in bond prices.
The immediate trigger for the rise in rates was the escalation of tensions in the Middle East. On July 8, U.S. President Donald Trump stated that the ceasefire with Iran was “now over,” and the U.S. Central Command announced the start of additional attacks on Iran. Iran has also hinted at the possibility of re-blockading the Strait of Hormuz.
As expectations for an end to hostilities, which had grown since June, diminished, the price of West Texas Intermediate (WTI) crude oil futures began to rise again. In Japan, which heavily relies on energy imports, there are increasing concerns that rising oil prices could drive up import and consumer prices. When prices rise, the attractiveness of government bonds, which pay fixed interest, diminishes, leading to stronger selling pressure and higher interest rates. The Nikkei also reported that the yield on U.S. 10-year Treasury bonds briefly rose to around 4.59% on July 8, the highest level since late May.
The depreciation of the yen has also contributed to the rise in interest rates. According to the Asahi Shimbun, Ayako Sera, chief economist at Mitsui Sumitomo Trust Bank, noted that the yen's decline to around 162 yen per dollar has heightened concerns about rising import prices, which in turn has pushed up long-term interest rates.
Concerns regarding the fiscal management of the Takaichi administration are also cited as a factor behind the rise in rates. The Nikkei highlighted that the government’s basic economic and fiscal policy framework, prepared at the end of last month, omitted the phrase “fiscal consolidation” that had been included until last year, drawing market attention. Investors are hesitant to purchase government bonds amid fears that aggressive fiscal policies could weaken fiscal discipline and lead to further rate increases.
The Asahi Shimbun reported that the omission in the basic policy framework was interpreted as a message aimed at restraining the BOJ's interest rate hikes. The framework emphasizes that “appropriate monetary policy management” is “very important.” There are growing concerns that if the BOJ delays rate hikes due to government influence, it could fall behind the curve in responding to inflation.
The Yomiuri Shimbun also noted that worries about fiscal deterioration and delayed BOJ responses have led to increased selling of government bonds. On July 7, Japan's Minister of Economic and Fiscal Policy, Minoru Kiyouchi, responded to market reactions regarding the basic policy framework, stating, “This is a misinterpretation and misunderstanding of the government's intentions.” The government is considering revising the controversial wording, but market concerns remain.
The Nikkei predicts that long-term interest rates are likely to approach the psychological barrier of 3%. Although a recent auction of 5-year bonds concluded smoothly, selling pressure continued across various maturities of government bonds. Investors are reluctant to buy long-term 10-year bonds due to uncertainty about future fiscal and monetary policies, making it difficult to reduce the additional yield, known as the term premium, that investors demand for holding bonds for extended periods.
Sera emphasized that Japan's economy, accustomed to ultra-low interest rates due to prolonged monetary easing, could suffer from excessive rate increases. She stated, “The BOJ must clearly demonstrate its commitment to achieving price stability through monetary policy, and the government needs to properly outline how it will balance its fiscal policies.”
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.