Japan’s Finance Ministry has raised the coupon rate on newly issued 10-year government bonds to 3.1 percent per year, marking the highest level in three decades. The adjustment, made during an auction on October 6, surpasses the ministry’s assumed interest rate of 3 percent for the fiscal 2026 budget. The coupon rate represents the interest the government promises to pay investors, and this increase will lead to higher debt servicing costs, potentially reducing fiscal flexibility.
The recent rise in long-term interest rates has been driven by the Bank of Japan’s shift in monetary policy, which began raising rates in 2024. Since Prime Minister Sanae Takaichi took office last October, market concerns over fiscal policies have contributed to a more than 1 percentage point increase in long-term interest rates. The coupon rate for 10-year bonds has been gradually rising, from 2.1 percent in early 2024 to 2.7 percent in July.
A senior Finance Ministry official described the rapid pace of the rate increase as ‘something out of science fiction.’ While the higher coupon will not immediately impact government financing, bonds issued at lower rates will mature and be replaced with higher-interest debt over time. With an outstanding debt balance of about 1,100 trillion yen, interest payments are projected to climb steadily, leaving less budget room for policy initiatives.
The Finance Ministry has set the assumed interest rate for the fiscal 2027 budget at 3.8 percent, with interest payments projected to reach a record-high 16.5 trillion yen. If current market yields above 3 percent persist, the ministry may need to raise the budgeted interest rate to more than 4 percent. Even with a slight decrease, interest payments are estimated to reach 35.9 trillion yen by fiscal 2035.