Behind the Curve Narrative Fails to Explain Rising Long-Term Rates

Experts are questioning whether the 'behind the curve' narrative is an adequate explanation for rising long-term interest rates. The term refers to a scenario in which delayed rate hikes by the Bank of Japan allow inflation to accelerate, ultimately forcing the central bank into aggressive tightening.

However, bond market experts are now analyzing changes in the FY2026 Japanese government bond yield curve and identifying a distinctive pattern: modest increases in medium-term rates alongside sharp rises in long- and ultra-long-term rates. This appears consistent with a behind-the-curve scenario at first glance, but when considering the timeline, it becomes clear that this picture does not align.

Michinori Tanji of Mizuho Securities points out that if near-term rate hikes prove inadequate and inflation accelerates in the future, that timing would be at most a few years out. In such a scenario, rates in the 3-5 year range should be rising sharply, but current market movements show long-term rates rising instead.

Tanji concludes that the rise in long-term rates is inconsistent with behind-the-curve concerns and suggests that the term has taken on a life of its own. Instead, he attributes the increase to fiscal expansion concerns under the Sanae Takaichi administration and simmering expectations of higher potential growth.