Japan government bond yields close to 2% per year… government interest burden 'snowballing'

Selling spreads ahead of interest rate decision

Ministry of Finance forecasts 2.5% per year in 2028

Government bond interest to double to 16 trillion yen

The yen continues to fall against the dollar

Takaichi: "Will respond to excessive volatility"

Japan's 10-year government bond yield has soared, raising concerns that the government's interest burden on government bonds will balloon. At this rate, interest payments on government bonds are expected to increase to about twice the current level in three years.

Concerns over a surge in government bond interest

On the 10th in the Japanese bond market, the 2-year government bond yield briefly spiked to 1.075% per annum. It was the highest level in 18 years since July 2007. Bond selling spread on speculation that the Bank of Japan is likely to raise the policy rate by 0.25 percentage points to 0.75% at the monetary policy meeting on the 18~19th.

The 10-year government bond yield, a benchmark of long-term interest rates, rose as high as 1.97% on the 8th. Observers say it is only a matter of time before it rises into the 2% range. If the 10-year yield exceeds 2% per annum, it would be the first time in 19 years since May 2006. Kazuo Ueda, Governor of the Bank of Japan, said at the House of Representatives Budget Committee on the 9th that "it is rising at a somewhat rapid pace."

Rises in short- and long-term interest rates are expected to translate into a burden for the Japanese government, which has issued government bonds exceeding 1,100 trillion yen. The Ministry of Finance expects long-term interest rates to rise from 2% this year to 2.5% in 2028. Accordingly, interest payments are estimated to increase from 7.9 trillion yen last year to 16.1 trillion yen in 2028, roughly doubling.

Even if interest payments increase, fiscal sustainability can be maintained if the economy grows and tax revenues rise. However, 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 rates are higher now, interest rates may rise during the normalization of monetary policy and surpass growth rates."

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

Takaichi warns against excessive weak yen

The continued decline of the yen against the dollar is also a concern for Japan. That day in the Tokyo foreign exchange market, the yen-dollar rate moved in the mid-156 yen per dollar range. It represented about a 0.5 yen weaker yen per dollar than the previous day. The spread of yen selling and dollar buying reflected expectations that U.S. employment figures released on the 9th (local time) showed stronger-than-expected results, leading to the view that the pace of U.S. rate cuts next year will be gradual.

Prime Minister Sanae Takaichi has expressed concern about an excessively weak yen. At the House of Representatives Budget Committee the day before, she said regarding the weak yen, "We will appropriately respond as necessary to excessive volatility or disorderly movements, including speculative trends." Japan's opposition parties have stepped up their attacks, saying Takaichi's 'responsible proactive fiscal policy' is the cause of the rise in long-term interest rates and the weak yen.

However, the weak yen is having a positive effect on Japanese exporters such as Toyota Motor Corporation. Toyota's stock price rose 1.63% that day on the Tokyo Stock Exchange to 3,116 yen per share, compared with the previous 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 falls by 1 yen per dollar.

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