Japan’s 10-year government bond yield broke through 3% on September 1. As long-term interest rates return to a 30-year high, U.S. Treasury Secretary Benson stated that Abenomics has been effective and Japan should cease its reflation policy. This opinion has brought attention to the next issue for Japan post interest rate normalization: as the cost of funds rises, does the aggressive fiscal policy of the government need adjustment?
On September 1, the 10-year bond yield in Japan briefly exceeded 3%, hitting a 30-year high since 1996. This not only marks a milestone in the bond market but also raises market concern over whether Japan’s era of long-term low interest rates is fundamentally shifting.
A report by “Nikkei Chinese” pointed out that the long-term interest rate, known as an “economic thermometer,” returning to the 3% range may symbolize Japan breaking free from the “lost 30 years.”
After the bursting of Japan’s economic bubble, Japan has endured about 30 years of low growth, low inflation, and stagnant wages, hence the era dubbed as the “lost 30 years.” During this period, Japan implemented ultra-loose monetary policies, keeping interest rates at extremely low levels, making the yen a significant low-cost funding currency globally. Now, with wage and inflation increases and a visible improvement in nominal economic growth, Japan’s interest rates are beginning to bid farewell to the long-standing low-rate environment.
Nevertheless, there is still external scrutiny on whether the Japanese economy has truly recovered enough to withstand this level of interest rates.
Professor Sun Guoxiang from the Department of International Affairs and Business Management at the University of Southern Taiwan analyzed for Epoch Times, stating that Japanese wages have risen for three consecutive years by over 5%, gradually transforming into household purchasing power, indicating changes in the cycle of wages, prices, and consumption.
However, Sun Guoxiang also pointed out, “This round of wage growth still involves a considerable amount stemming from labor shortages, input inflation, and enterprises being forced to pass on costs, not necessarily solely from productivity improvements.”
He believes that the key to determining whether Japan can withstand this level of interest rates lies in what factors are driving the 3%.
Sun Guoxiang elaborated that if the 3% yield on 10-year government bonds is mainly driven by economic growth, it signifies a normalization of interest rates; if mainly propelled by rising issuance costs, it could indicate Japan transitioning from a period of low rates and economic stagnation to a scenario with high financing costs and low growth coexisting.
Meanwhile, with Japan’s 10-year bond yield surpassing 3%, the future policy direction is also under scrutiny. If Japan’s deflation environment has fundamentally changed, does the government still need to continue its past reflation policy?
U.S. Treasury Secretary Benson stated on September 1 that Japan should cease its reflation policy, believing that Abenomics has been effective and it is time to contemplate the outcomes of this policy.
However, the Japanese government has not altered its policy direction in response. Chief Cabinet Secretary Minakawa Minoru stated that the government’s stance on “aggressive fiscal policy” remains unchanged without commenting on Benson’s remarks.
In contrast to the fiscal policy leaning towards expansion, the Bank of Japan’s monetary policy is gradually normalizing. BOJ Governor Haruta Kazuo stated on September 1 that all monetary policy meetings, including September, will discuss the possibility of raising interest rates, expressing increased vigilance towards upward price risks. Expectations for a rate hike in September are thus further intensifying in the market.
As the Bank of Japan steadily advances in normalizing its monetary policy, the government continues to uphold an aggressive fiscal stance. The Ministry of Economy, Trade, and Industry of Japan proposed a budget for the 2027 fiscal year on August 31 with a total amount reaching 7.8 trillion yen, marking a historical high in scale, planning to increase public investment in semiconductors, AI, and other core strategic industries.
This also highlights the policy dilemma Japan faces in a rising interest rate environment: the government not only needs to sustain economic growth but also has to confront continually increasing financing costs.
Chief Economist at Daiwa Securities, Suezumi Tetsuya, believes that Benson’s call for Japan to end its reflation policy does not indicate that the government will suddenly shift towards fiscal tightening. Japan is more likely to gradually reduce the expansionary fiscal nature and shift the policy focus towards enhancing supply capacity and growth in the private sector.
Sun Guoxiang believes that Japan’s future aggressive fiscal policy should focus more on boosting productivity and real income growth, including corporate investment, digitization, artificial intelligence, efficiency in the service sector, and improving the profitability of small and medium-sized enterprises.
In Sun Guoxiang’s view, Japan’s policy focus in the future does not have to directly shift from “aggressive fiscal policy” to “austerity fiscal policy” but can gradually transition from stimulating demand to enhancing supply capacity.
It is crucial to note that the effects of Japan’s interest rate normalization will not only remain within Japan’s borders.
Sun Guoxiang expressed that in the past, funds from Japanese banks, life insurers, and pension funds flowed overseas due to low domestic returns. Now, with Japanese government bonds offering around a 3% yield and rising hedging costs, the attractiveness of domestic bonds will increase.
On the other hand, the rise in Japan’s long-term bond yields may weaken the long-standing support Japan has provided to the global bond market, particularly the U.S. bond market, through its low-interest rate environment.
Regarding this, Sun Guoxiang mentioned that Japan’s fund inflow will not solely determine U.S. bond yields but may become part of structural pressure. The global market is more likely to face not an abrupt loss of liquidity but a gradual change brought about by the 30-year period of Japan’s low rates, yen carry trade, and overseas bond purchases.
Quoting Mitsui Sumitomo Trust Bank’s Chief Market Strategist, Shimazu Daisuke, Japan has been in a “world without interest rates” for about 30 years. With monetary policy gradually normalizing and the 10-year government bond yield reaching 3%, “it’s actually not that high.” This implies that 3% itself may not be a new threshold for Japan’s economy, and the real test lies in whether corporate investments, wages, and productivity can collectively support a “Japan with interest rates.”