Japan government bond yields near 2% a year…government interest burden 'snowballing'

Selling spreads ahead of rate decision

Ministry of Finance forecasts 2.5% a year by 2028

Government bond interest doubles to 16 trillion yen

The yen per dollar rate keeps falling

Takaichi "Will respond to excessive volatility"

As Japan's 10-year government bond yield soars, concerns are growing that the interest burden on Japanese government bonds will swell like a snowball. If this continues, bond interest payments are expected to roughly double in three years.

Concerns over sharp rise in bond interest

On the 10th, the yield on 2-year government bonds in the Japanese bond market briefly spiked to 1.075% a year. This is the highest level in 18 years since July 2007. Observations that the Bank of Japan is likely to raise its policy rate by 0.25 percentage points to 0.75% a year at the monetary policy meeting on the 18th–19th led to widening bond selling.

The 10-year government bond yield, a long-term rate indicator, rose to 1.97% a year at one point on the 8th. Many view it as a matter of time before it reaches the 2% range. If the 10-year yield exceeds 2% a year, it would be the first time in 19 years since May 2006. Kazuo Ueda, Governor of the Bank of Japan, said at the Diet budget committee on the 9th that recent rate increases are "rising at a somewhat rapid pace."

Rising short- and long-term rates are expected to increase the burden on the Japanese government, which has issued more than 1,100 trillion yen in government bonds. The Ministry of Finance expects long-term rates to rise from 2% a year this year to 2.5% a year in 2028. Accordingly, it estimates interest will increase from 7.9 trillion yen last year to 16.1 trillion yen in 2028, roughly doubling.

Even if interest rises, fiscal sustainability can be maintained if the economy grows and tax revenues increase. The key question is whether economic growth will continue to outpace interest rates. Yohei Kobayashi, senior chief researcher at Mitsubishi UFJ Research & Consulting, pointed out, "Even if growth is higher now, during the normalization of monetary policy rates may rise and invert relative to growth."

The outlook for companies is mixed. According to Teikoku Databank, if corporate borrowing rates rise by 0.25 percentage points, interest burdens per company would increase by 680,000 yen annually, reducing ordinary profit by an average of 2.1%. On the other hand, companies with large financial assets see an increase in interest income.

Takaichi warns against excessive yen weakness

The continued decline of the yen against the dollar is also a concern for Japan. In Tokyo's foreign exchange market that day, the dollar-yen rate moved in the mid-156 yen per dollar range. It showed about a 0.5-yen weaker yen compared with the previous day. Stronger-than-expected U.S. employment data released on the 9th (local time) led to expectations that the pace of U.S. rate cuts next year will be gradual, prompting yen selling and dollar buying.

Prime Minister Sanae Takaichi expressed concern about excessive yen weakness. At the Diet budget committee the previous day, she said regarding the weak yen, "We will take appropriate measures as necessary against excessive volatility or disorderly movements, including speculative trends." Japan's opposition parties have stepped up attacks, saying Takaichi's 'responsible proactive fiscal policy' is the cause of rising long-term rates and yen weakness.

However, yen weakness is positive for Japanese exporters such as Toyota Motor. Toyota's share price rose 1.63% from the previous day to 3,116 yen per share on the Tokyo Stock Exchange that day. Toyota assumes an expected exchange rate of 145 yen per dollar for October 2025–March 2026. Toyota's operating profit increases by about 50 billion yen when the yen weakens by 1 yen per dollar.

Tokyo = Correspondent Il-gyu Kim black0419@hankyung.com