Credit Ágricole: Japan
The rise in Japan’s 10-year JGB yield towards 3% is widely viewed as excessive after decades of low interest rates, with much of the increase attributed to concerns over the Takaichi administration’s expansionary fiscal policy. However, fiscal anxiety alone is unlikely to explain the move. Other drivers include expectations of sustained nominal growth above 3%, stronger global demand for long-term funding, interest paid on BoJ current account balances, reduced BoJ JGB purchases, overseas investment by pension funds and markets pricing in a higher terminal policy rate. Japan’s new growth strategy signals a shift towards public-private investment and a fiscal framework that balances economic expansion with sustainability, rather than prioritising a primary surplus in a single fiscal year. If real interest rates remain supportive of investment, corporate spending should strengthen, with the corporate sector’s long-standing savings surplus expected to turn into an investment deficit by 2028. This would mark a potential break from Japan’s prolonged period of structural stagnation. As inflation settles around 2% and potential growth remains near 0.5%, the nominal policy rate could normal
The rise in Japan’s 10-year JGB yield towards 3% is widely viewed as excessive after decades of low interest rates, with much of the increase attributed to concerns over the Takaichi administration’s expansionary fiscal policy. However, fiscal anxiety alone is unlikely to explain the move. Other drivers include expectations of sustained nominal growth above 3%, stronger global demand for long-term funding, interest paid on BoJ current account balances, reduced BoJ JGB purchases, overseas investment by pension funds and markets pricing in a higher terminal policy rate.
Japan’s new growth strategy signals a shift towards public-private investment and a fiscal framework that balances economic expansion with sustainability, rather than prioritising a primary surplus in a single fiscal year. If real interest rates remain supportive of investment, corporate spending should strengthen, with the corporate sector’s long-standing savings surplus expected to turn into an investment deficit by 2028. This would mark a potential break from Japan’s prolonged period of structural stagnation.
As inflation settles around 2% and potential growth remains near 0.5%, the nominal policy rate could normalise in the mid-2% range, supporting 10-year yields around 3% and super-long yields near 4%. These levels should not automatically be interpreted as evidence of fiscal distress. If Japan is transitioning towards stronger growth and sustained inflation, higher yields may instead reflect the normalisation of interest rates as the economy moves beyond its deflationary era.