Japan's Economy Under Strain as Long-Term Interest Rates Climb

Rising long-term interest rates in Japan and the US are putting pressure on households and businesses. Long-term interest rates, which serve as a gauge of the economy's condition, can have both positive and negative effects.

In Japan, if borrowing costs rise by just 0.5 percentage point, more than 5,600 small and midsize companies could become unprofitable, according to data. This increase in interest rates makes borrowing more expensive and can discourage the flow of money through the economy.

The Bank of Japan is set to hold a two-day monetary policy meeting on September 17 and 18 as persistent inflation continues to complicate the outlook for interest rates. If the central bank appears slow to raise rates despite ongoing price increases, concerns that delayed action could harm the economy may intensify, leading to higher long-term interest rates.

The Bank of Japan Governor Kazuo Ueda's comments on September 18 will be closely watched as they could provide a clear message about the pace of further rate increases. Long-term yields are already under upward pressure in both Japan and the US, with Japanese bond market yields temporarily returning to the 3% range.

The increase in US yields has contributed to rising interest rates in Japan, fueled by expectations that the Federal Reserve could raise interest rates to curb inflation. This added upward pressure on borrowing costs is expected to continue without a clear signal from the Bank of Japan about further rate increases.