Japan's Fiscal Credibility Takes Hit as Long-term Rates Surge

Japan's long-term interest rates surged to 3 percent for the first time in about 30 years on September 1, reaching a pace of 0.9 percentage point increase in just eight months.

The hike is largely driven by domestic concerns over increased deficit-financing bond issuance due to Prime Minister Sanae Takaichi's expansionary fiscal policy. The Finance Ministry received requests totaling more than 143 trillion yen ($906 billion) for the fiscal 2027 general account budget, a record high and a sharp increase from the previous year.

The government would need to issue more government bonds to cover the projected shortfall of about 43 trillion yen, making higher interest rates inevitable. The situation is further complicated by the decision to cut the consumption tax rate on food and beverages to 1 percent for two years, which could lead to an additional bond issuance of nearly 50 trillion yen if funding cannot be secured.

Economist Hideo Kumano warns that long-term rates in Japan could plausibly rise into the mid-3-percent range due to its poor fiscal position. He suggests that limiting the fiscal 2027 initial budget and clearly identifying funding for the consumption-tax cut would be crucial to maintaining confidence in the country's finances.