【Politics & Economics 】 “Interest rates have risen” alone tells you nothing | Why mixing up policy rates and government bond yields (long-term interest rates) leads to …
👀What you will learn in this article
・What is the fundamental difference between “policy rates” and “government bond yields”?
・Actual interest rate levels as of September 2026
・How these two interest rates affect stocks and foreign exchange respectively
・Why “rate hike = government bond yields also rise” is not always true
Introduction
“Bank of Japan raises rates”
“Long-term interest rates at 30-year high”
News headlines are filled with such “interest rate hikes”.
I think many people take this collectively as “interest rates have risen.”
But what about it when viewed through its structure?
“Policy rates” and “government bond yields” differ completely in terms of the entity that determines them, what they signify, and how they affect stocks and foreign exchange.
I believe that if you read these two together, you will misunderstand the meaning of the news.
In this article, I will organize the differences between these two interest rates based on their mechanisms rather than emotions.
🟠 Why | Why “interest rates have risen” alone leads to misjudgment
Seeing the news that “interest rates have risen,”
I think many people first react by thinking,
“This is bad for stocks” or “I’m worried about my mortgage.”
However, I believe that what actually happens depends entirely on which “interest rate” is being referred to.
Did the policy rate rise?
Or did government bond yields rise?
Depending on which one it is,
・Industries susceptible to impact
・Impact on mortgages (variable vs. fixed)
・What the market is pricing in to begin with
will change.
That is precisely why I believe that instead of reacting just to news headlines, first distinguishing “which interest rate is being discussed” becomes the foundation for investment decisions.
🔵 How | What is the difference between policy rates and government bond yields?
① Who decides them, and the fundamental difference
—Explanatory Diagram ①: Fundamental differences between policy rates and government bond yields—
First, I would like to clarify the fundamental difference between these two interest rates.
Policy rates
are short-term interest ratesdetermined by central banks like the Bank of Japan as part of monetary policy. The duration is short-term, and they directly affect bank funding costs, deposit interest rates, and variable-rate mortgage interest rates. I consider policy rates to reflect how a central bank views the “current state of the economy and prices.”
Government bond yields
on the other hand, are not directly determined by the central bank. They are
interest rates determined daily by the buying and selling of investors in the government bond market. A representative indicator is the yield on newly issued 10-year government bonds, which is often referred to in the news as
“long-term interest rates.”
In this article, I will prioritize clarity by using the term “government bond yields,” but if you see “long-term interest rates” in reports, you can assume they refer to the same thing.
They affect fixed-rate mortgages and the valuation of growth stocks.
I consider government bond yields to reflect the future expectations of market participants regarding “how interest rates and inflation will develop from here on.”
In other words, I view policy rates as numbers that reflect the “present”,
and government bond yields as numbers that reflect “future expectations.”
as such.
② The two interest rates viewed at current levels
—Explanatory Diagram ②: Interest rate levels as of September 2026—
Here, I would like to look at the actual numbers.
On September 18, 2026, the Bank of Japan decided at its Monetary Policy Meeting to
raise the policy interest rate to 1.25%
This is considered to be the highest level in 31 years since 1995.
The background is reported to be a “twist” in prices, where the corporate goods price index rose by 7.6% year-on-year, while the core consumer price index (core CPI) remained at only +1.8%.
Meanwhile, the government bond yield (yield on newly issued 10-year government bonds) temporarily rose to around 2.95–3.0% between the end of August and early September 2026, reaching its highest level in about 30 years since 1996.
In other words, as of September 2026,
・Policy interest rate: 1.25%
・Government bond yield: approx. 3.0%
is the situation.
It can be seen that the government bond yield is at a significantly higher level than the policy interest rate.
I believe that this gap itself also reflects the market’s perspective.
③ Policy interest rates and government bond yields do not necessarily move in tandem.
—Explanatory Diagram ③: The mechanism by which policy interest rates and government bond yields do not move in tandem—
This is the point I most want to convey this time.
Just because the policy interest rate has risen does not necessarily mean that government bond yields will rise in the same way.
For example, when the Bank of Japan raises interest rates, if the market judges that
“inflation will settle down with this, and no further rate hikes seem necessary,” then
it is possible that government bond yields will actually fall even though the policy interest rate has risen.
Conversely, if the market judges that “further rate hikes still seem necessary,” then
government bond yields will rise along with the increase in the policy interest rate.
In other words, when looking at monetary policy meetings,
I believe it is important not only to look at “whether or not rates were raised,” but also to look at
“how government bond yields (10-year JGB yields) reacted after the announcement.”
In fact, the sharp rise in government bond yields in August 2026 is considered to have been partly driven by growing expectations of an early rate hike by the Bank of Japan, and it is believed that the market’s anticipation that “policy rates will continue to rise in the future” pushed up government bond yields.
④ The “map” of interest rates: The yield curve
—Explanatory Diagram ④: Yield Curve (Normal Yield and Inverted Yield)—
I would like to introduce another concept that is useful for understanding the relationship between policy rates and government bond yields.
It is the term “yield curve.”
Since many people may not be familiar with it, I would like to think about it using a familiar example.
With a bank time deposit, if you deposit money for one year versus ten years, which do you think would have a higher interest rate?
Usually, the 10-year rate is higher.
Because your money is tied up for longer, the reward for that “patience” becomes greater.
This is the same for government bonds; bonds that are repaid in 10 or 30 years usually have higher interest rates than bonds that are repaid in one year.
This normal upward-sloping shape, where “interest rates rise as the term gets longer,” is called a “normal yield curve.”
I think of the yield curve as “a line connecting interest rates for different terms, arranged from shortest to longest.”
It is, so to speak, a “map” of interest rates.
However, sometimes this order is reversed.
This is a state where short-term interest rates become higher than long-term interest rates.
This is called an “inverted yield curve.”
It is believed that an inverted yield curve occurs when the market anticipates that “the economy will deteriorate in the future, and the central bank will have to cut interest rates.”
Because long-term interest rates fall first in anticipation of future rate cuts.
An inverted yield curve is also often watched with caution in the stock market as a “sign of recession.”
And, as mentioned in a previous article, banks have a business model of “borrowing money short-term and lending it long-term.”
A normal yield curve tends to be a tailwind for bank stocks because the difference between these short-term and long-term interest rates easily becomes the bank’s profit (interest margin).
Conversely, an inverted yield curve is considered a headwind for bank stocks because it squeezes this interest margin.
🟢 What | How to interpret each interest rate as an investor
① How does a rise in the policy rate affect bank and insurance stocks?
When the policy rate rises, bank lending rates tend to rise, and the spread between them and deposit rates tends to widen.
Therefore, a rise in the policy rate is generally considered a positive factor for bank and insurance stocks.
However, this is not a simple matter either.
If interest rates rise sharply, the price of government bonds held by banks falls, which can lead to valuation losses.
Also, a rapid rise in interest rates could lead to a deterioration in corporate financing and an increase in loan defaults.
In other words, I believe that “a rate hike does not necessarily mean bank stocks will rise.”
② Why are semiconductor and AI stocks prone to being sold off when government bond yields rise?
—Explanatory Diagram ⑤: Future profits diminished by the discount rate—
A rise in government bond yields is what I believe has a more direct impact on growth stocks, especially semiconductor and AI-related stocks.
This is not so much about a deterioration in corporate profits themselves, but rather that the “discount rate” used to calculate stock prices rises, which becomes the problem.
The higher the interest rate, the lower the present value of money received in the future is evaluated.
For example, if you can receive 1 million yen in 10 years,
if the interest rate is 0%, its present value remains almost 1 million yen.
But if the interest rate is 3%, the present value shrinks to approximately 740,000 yen.
In short, 1 million yen today is worth more.
This can be understood by calculating with compound interest discounting, but it has the property that the higher the interest rate, the more the present value of profits further in the future is eroded.
Semiconductor and AI-related companies often have “high future earnings potential” expectations rather than current profits, which leads to high P/E (Price-to-Earnings) ratios.
That is why when government bond yields rise, the present value of those “future profits” shrinks, and stock prices are considered prone to downward pressure.
③ How it connects to foreign exchange (USD/JPY)
I believe the discussion of interest rates is directly linked to foreign exchange.
Basically, if the interest rate gap between Japan and the US narrows, it tends to move toward a stronger yen.
When looking at USD/JPY,
BOJ policy rate → Japanese government bond yields → US interest rates → Japan-US interest rate gap → USD/JPY
I find it easy to organize it in this flow.
For reference, at the September 2026 FOMC (Federal Open Market Committee), the FRB raised the policy rate by 0.25% to 3.75–4.00%.
This is said to have been the first rate hike in 3 years and 2 months since July 2023.
In a phase where interest rates are rising in both Japan and the US, I believe the direction of the interest rate gap is determined by which interest rate is moving faster and by a larger margin, and that is reflected in the exchange rate.
If you want to incorporate this into your daily USD/JPY analysis, I believe it becomes a practical perspective if you look beyond the policy rate itself to see “how the 2-year and 10-year bond yields of both Japan and the US reacted to the announcement.”
④ Ultimately, what should you look at?
To summarize what we have covered so far, I believe the things you should be aware of as an investor are simple.
When you hear in the news that “interest rates have risen,” first,
first distinguish between “whether it is about policy rates or government bond yields.”
Movements in policy rates are a clue to considering
the impact on bank and insurance stocks, as well as deposits and variable-rate mortgages.
Movements in government bond yields are a clue to considering the impact on the valuation of growth stocks, fixed-rate mortgages, and foreign exchange.
Furthermore, keeping in mind that policy rates and government bond yields do not necessarily move in the same direction, check not only the announcements from the Monetary Policy Meeting but also the subsequent reaction of government bond yields.
I believe that whether or not you take this extra step significantly changes the resolution of the news.
⑤ Rising government bond yields rebound on public finance
—Explanatory Diagram ⑥: The vicious cycle where rising government bond yields pressure public finance—
Finally, I would like to mention one more major impact.
I believe that rising government bond yields are directly linked not only to stocks and foreign exchange but also to the nation’s public finance itself.
The initial budget for fiscal year 2026 reached a record high of 122.3 trillion yen in the general account, and “government bond expenses,” which combine the repayment of national debt and interest payments, also reached a record high of 31.2758 trillion yen.
Of this, interest payments alone amount to 13.0371 trillion yen, which is said to be an increase of 2.5 trillion yen from the previous fiscal year.
Furthermore, the Ministry of Finance has raised the “assumed interest rate” used to calculate interest payments from 2.6% at the beginning of fiscal year 2026 to 3.0% by the end of the fiscal year.
According to estimates by the Fiscal System Council, if a case where government bond yields rise significantly is assumed, interest payments could swell to 45.2 trillion yen by fiscal year 2035, which is more than three times that of fiscal year 2026.
Here, I would like to introduce an interesting point made in the Fiscal System Council’s materials.
It is the point that rising interest rates “doubly” restrict the freedom of public finance.
The first is simply that interest payments increase, reducing the money available for other policies.
The second is that if investors become wary of fiscal deterioration, they will demand even higher yields when buying government bonds, which leads to further increases in interest payments.
In other words, I believe that confidence in fiscal management and government bond yields have a mutually influential relationship.
I think this is also fundamentally connected to the article I covered previously on the reduction of the consumption tax on food products.
Concerns about the decrease in tax revenue due to tax cuts heighten vigilance regarding fiscal deterioration, which becomes upward pressure on government bond yields.
And if government bond yields rise, it will further pressure public finances in the form of interest payment costs.
When looking at news about interest rates, I believe it is worth keeping in the back of your mind not only the impact on stock prices and exchange rates, but also the impact on public finances over a slightly longer time horizon.
📝 Summary
・You cannot accurately understand what is happening just from the news that ‘interest rates have risen’.
・Policy rates are short-term interest rates set by central banks, while government bond yields are interest rates determined in the government bond market that reflect future expectations.
・As of September 2026, the policy rate is 1.25% (a 31-year high), and the government bond yield is approximately 3.0% (a 30-year high).
・Even if policy rates rise, government bond yields may or may not rise depending on the market’s forward-looking expectations.
・An increase in policy rates tends to affect bank and insurance stocks, while an increase in government bond yields tends to affect growth stocks such as semiconductors and AI in different ways.
・Exchange rates are easily moved by the direction of the interest rate differential between Japan and the U.S., and it is practical to look at the reactions of both Japanese and U.S. government bond yields.
・Depending on whether the yield curve (a curve plotting interest rates by maturity) is the normal upward slope (positive yield) or inverted (inverted yield), the impact on bank stocks and the outlook for the economy will change.
・The rise in government bond yields increases the country’s interest payment costs and pressures public finances, and the vigilance toward fiscal deterioration leads to further interest rate hikes, creating a mutually influential relationship.
This article is for informational purposes only and does not recommend any specific investment actions.
Please make investment decisions at your own risk.
🖊️ Finally
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・Monday: Investing (Market commentary, individual stocks, FX)
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