ICYMI - Rising yields force Japan to budget for higher debt-servicing costs

Rising Government Bond Yields Impacting Japan

Japan's government plans to assume a 3% interest rate on long-term government bonds for the FY2026 budget, marking the highest level in about two decades. This interest rate assumption is a reflection of rising market yields and the normalization of Bank of Japan's policies. The key drivers for this surge in assumed rates include rising market yields, with 30-year JGBs exceeding 3% for the first time since their introduction, and the Bank of Japan raising its policy rates to 0.75%, the highest level in 30 years. Additionally, Japan's national debt exceeds 230% of GDP, raising concerns over debt sustainability due to recent large fiscal packages. The sign of a 3% interest assumption indicates that Japan is acknowledging a higher rate environment, potentially constraining fiscal flexibility and impacting the way the government manages its debt servicing costs. This shift in fiscal narrative may strengthen investor confidence but reflects a harsher financing landscape.