Japan eyes fiscal 2027 assumed bond interest rate at 3.8%

The Finance Ministry is considering setting the assumed interest rate on long-term Japanese government bonds at 3.8% in its fiscal 2027 budget request, sources have said.

The assumed interest rate, used to calculate the government’s debt-servicing costs, is expected to be raised significantly from 3% in the fiscal 2026 budget, reflecting the recent climb in long-term interest rates.

Japan’s debt-servicing costs are expected to balloon as a result.

The assumed rate is calculated by adding around 1.1 percentage points to current interest rate levels to account for the risk of sudden spikes.

It was set at 2.6% in the fiscal 2026 budget request, but was raised to 3% during the budget compilation process at the end of 2025, after long-term rates shot up on concerns over the expansionary fiscal policy of Prime Minister Sanae Takaichi.

As a result, ¥31.28 trillion was earmarked for debt-servicing costs in fiscal 2026.

In fiscal 2027, the ministry plans to accept funding requests without a predetermined cap under a new “strong and prosperous Japan” investment quota and, in principle, allocate funds for regular measures in the initial budget to end dependence on supplementary budgets.

As a result, the total amount of budget requests from government agencies is expected to exceed some ¥122.4 trillion in fiscal 2026, marking a record high for the fourth consecutive year.

Long-term interest rates are continuing to rise in anticipation of faster policy rate hikes by the Bank of Japan, concerns over the fiscal policy of the Takaichi administration, and rising global inflationary pressures linked to turmoil around Iran.

The yield on the newest 10-year JGB issue, Japan’s benchmark long-term rate, briefly reached a roughly 30-year high of 2.945% in Tokyo interdealer trading Tuesday.

The ministry will receive budget requests until the end of this month. The government will compile a fiscal 2027 budget plan by the end of this year.