Can tax incentives for individual government bonds move long-term interest rates?
In the previous article, we established that “the Bank of Japan decides the policy interest rate, while the market decides long-term interest rates.”
So, who is buying government bonds in that market?
Until now, the largest buyer has been the Bank of Japan. That same Bank of Japan is now reducing its purchases.
Tax incentives for individual government bonds have emerged as a candidate to fill that void.
In this article, we have organized these developments based on articles from the Nikkei Electronic Edition (January to October 2026).
There are three key points.
・Tax incentives are less of a measure to suppress interest rates and more of a “search for buyers” to fill the hole left by the Bank of Japan. ・The effect shown in estimates is 0.12% (12bp) for 10-year bonds, which is equal to or less than daily price fluctuations. ・What the market is ultimately watching is confidence in fiscal policy.
※This article summarizes the content of articles from the Nikkei Electronic Edition. Figures are as of the time each article was published. The tax system is scheduled to be decided at the end of the year, and this article is a summary of the current discussion. This is not investment or tax advice.
◆ What is being considered?
First, let’s list the background.
・June 18, 2026: Liberal Democratic Party House of Representatives member Kenji Nakanishi proposed inheritance tax exemptions for individual government bonds at the party’s Asset Management Nation Promotion League. ・July 2026: The Democratic Party for the People submitted a bill to the House of Councillors to include government bonds in NISA (Nippon Individual Savings Account) and exempt interest, capital gains, and inheritance tax. ・July 10, 2026: Finance Minister Satsuki Katayama stated that she wants to quickly materialize the review of product features for individual government bonds and the design of new products. ・August 26, 2026: The Financial Services Agency and the Ministry of Finance presented a proposal to the LDP’s division that included tax incentives in the fiscal 2027 tax reform requests. ・August 31, 2026: Requests from each ministry are collected. ・October 12, 2026: Former Prime Minister Fumio Kishida expressed a cautious view in an interview with Nikkei. ・Around December 2026: The government and ruling parties are scheduled to compile the tax reform outline.
What we want to grasp here is the content of the requests.
The requests from the Ministry of Finance and the Financial Services Agency are “item requests” that do not show details.
Whether they will be included in NISA or if inheritance tax will be reduced. Whether the target government bonds will be narrowed down. Nothing has been decided.
Mr. Kishida stated that NISA is a system for directing savings toward risk money. Based on that, he expressed doubt, saying that including government bonds is inappropriate.
On the other hand, he also said that reviewing the product features of individual government bonds and designing new products is important.
◆ Why individuals: The hole left by the Bank of Japan
In the previous article, as mentioned in point ⑦, for a long time in Japan, the Bank of Japan bought large amounts of government bonds to suppress long-term interest rates.
Now, it has moved out of that framework. The Bank of Japan has been gradually reducing its government bond purchases since August 2024.
At the June 2026 meeting, it was decided to stop the reduction after April 2027 and continue purchasing about 2 trillion yen per month.
However, since the redemption of government bonds purchased in the past is progressing, the balance held is expected to continue to decrease.
So, who are the alternative buyers? The article presented the circumstances for each candidate.
・Banks: There is a limit to the amount of government bonds they can buy due to regulations that curb interest rate risk.・Overseas investors: Considered “tourist money” that pulls out immediately if yields worsen.・Pension funds (GPIF): There is an estimate of about 7 trillion yen in purchases from April to June due to rebalancing (adjustment of asset allocation). However, their movements depend on stock prices.・Households: The remaining candidate.
It is believed that there is significant room for households to buy.
・Government bonds held by households account for about 1.7% of the outstanding balance, or about 20 trillion yen (as of the end of March 2026).・Household cash and deposits total 1,126 trillion yen.・There is a view that if the household bond ratio reaches the level of the United States, there is room for 100 trillion yen in purchases.
Individual government bonds are already gaining popularity.
・Fixed 5-year interest rate: 2.06% (for September issuance), 2.24% (for October issuance). Both are record highs.・Variable 10-year interest rate: 1.87% (for September issuance), 1.95% (for October issuance).・5-year time deposits at megabanks are around 1%.・The issuance amount from April to August of fiscal year 2026 was approximately 4.0661 trillion yen. This is a 66% increase compared to the same period last year.
Interest rates higher than those of deposits are supporting their popularity.
◆ How much does it affect long-term interest rates?
As organized in the previous section (5), if there are many people who want to buy, the price of government bonds rises, and the yield (interest rate) falls.
So, if individual purchases increase, how much will long-term interest rates fall?
The estimate in the article is from Barclays Securities.
・If household government bond holdings increase by a maximum of 80 trillion yen.・The yield on 10-year bonds will fall by about 0.12% (12bp).・The yield on 20- to 30-year bonds will fall by more than 0.2% (20bp).
※bp (basis point) refers to 0.01%. 12bp is 0.12%.
I will compare these figures with actual price movements.
On January 20 of this year, ultra-long-term bonds plummeted. The yield on 30-year bonds rose by 0.27% in one day to reach 3.88%.
40-year bonds also rose by 0.275% to 4.215%. Both were record highs.
In mid-May, the yield on 10-year bonds rose to 2.8%. This is the highest level in about 29 and a half years, since October 1996.
The maximum effect of the estimate (0.12% for 10-year bonds) is a smaller range than the daily price movement.
Moreover, the premise of 80 trillion yen is a fairly large figure.
The Nikkei does not position the expansion of individual government bonds as a central measure for the stable issuance of government bonds.
I think what can be said up to this point is as follows.
A certain downward pressure effect is expected. However, it is seen as a supplementary supply-and-demand measure, not the main driver that influences interest rates.
However, the scale will change depending on the content of the incentives.
NLI Research Institute estimates that, assuming incentives such as NISA, there is a possibility that around 100 trillion yen will flow into government bonds over 10 years. What is decided at the end of the year will be the turning point.
◆ How is this different from “suppression”?
“Increase buyers of government bonds to suppress interest rates.”
Hearing that, it might look the same as the Bank of Japan’s interest rate suppression (Yield Curve Control) that appeared in (7) last time.
Let’s list the differences.
▼ BOJ suppression (from 2016)・Goal: Keep 10-year bond yields around 0%・Means: BOJ buys large amounts of government bonds・How interest rates are determined: BOJ decides the level
▼ This search for buyers・Goal: No target level・Means: Encourage private buying through tax systems and product features・How interest rates are determined: The market continues to decide
The reason individuals buy government bonds is that the yield is higher than deposits. Even if there are tax incentives, it is the people participating in the market who decide at what price to buy.
The explanations from the government and ministries also do not touch on the level of interest rates.
・Ministry of Finance: Emphasizes individuals as a destination for absorption that will hold government bonds stably over the long term・Basic Policies (July 2026): Aim to expand the domestic investor base by improving the appeal of individual government bonds
The aim is not to determine interest rates, but to increase buyers and stably absorb government bonds.
As a result, it works in the direction of softening the rise in interest rates. However, it is not a means to manipulate interest rates.
◆ What happens if buyers cannot be found?
In the first place, what happens if buyers cannot be found?
It does not mean that government bonds cannot be issued. The price (interest rate) acts as the adjustment mechanism. The price falls and the yield rises until a level where buyers appear.
January 20th was an example of that. Almost no buyers for super-long-term bonds appeared, and the price plummeted.
When yields rise, the following things happen:
・The government’s interest payments increase
・If anxiety about public finances intensifies, interest rates rise further (a movement known as bond vigilantes)
・Variable-rate mortgage loans and corporate borrowing rates rise
・Valuation losses on government bonds held by banks expand
This also overlaps with the point about “the speed of change rather than the level” that was touched upon in (6) last time.
◆ How is the market taking this?
I have gathered views from different standpoints based on the articles.
▼ Favorable views
Overseas investors stated in July that it is a rational policy.
The reason is that if the government can make the government bond market attractive through tax incentives, it can issue government bonds in anticipation of significant demand. This investor closed out their short position on Japanese government bonds.
▼ Cautious views
・There are voices saying that even if a stable buyer for government bonds is found, it does not mean that fiscal consolidation can be put on the back burner (market participants)
・There is a risk that the more the government increases incentives for purchase, the more it will cause the market to doubt whether stable digestion is possible (Nikkei)
・Even among senior officials at the Ministry of Finance, there are voices saying they cannot find a reason to provide inheritance tax incentives only for individual government bonds
▼ Banks’ views
・They are wary of funds moving from deposits to government bonds
・NLI Research Institute estimates a capital inflow of 100 trillion yen over 10 years
・It is said that individual deposits account for nearly 70% of total deposits at regional banks
・Bank stocks are being selected based on their ability to gather deposits
Market interest can be summarized as follows, rather than the level of interest rates itself:
・Measures to increase buyers will stabilize supply and demand
・However, the premise is trust in public finances
The fact that the sharp drop in January was triggered by the announcement of a consumption tax cut tells the story.
◆ Another point of contact between policy rates and long-term interest rates
The interest rate for individual government bonds is based on the yield of government bonds determined in the market.
According to the Ministry of Finance’s explanation, it is as follows:
・Variable 10-year: A value calculated by multiplying the yield (base rate) calculated from the bidding results of 10-year fixed-rate government bonds by 0.66. Reviewed every six months
・Fixed 5-year: A value obtained by subtracting 0.05% from the assumed yield of 5-year government bonds (calculated from actual market yields)
・Fixed 3-year: A value obtained by subtracting 0.03% from the assumed yield of 3-year government bonds
The “10-year government bond yield,” which is the basis for the variable 10-year, is the very indicator of the “long-term interest rate” covered in the previous article. In other words, the interest rate for the variable 10-year is linked to the long-term interest rate.
For example, the variable 10-year issued in October was 1.95%. If you divide by 0.66, the base rate is in the mid-2.9% range (my reverse calculation).
Here, a cycle becomes visible:
・Market interest rates rise due to Bank of Japan rate hikes, etc.
・The interest rate on individual government bonds rises, becoming more attractive than deposits
・Individual purchases increase
・Purchases can affect long-term interest rates through the supply and demand of government bonds
Long-term interest rates determine the coupon rate, the coupon rate attracts buyers, and buying activity feeds back into long-term interest rates. That is the nature of their relationship.
Additionally, let us recall point 8 from the previous discussion.
Policy interest rates and long-term interest rates are different things. There was a view that if politics becomes too involved, trust in the central bank and the government will decline, and long-term interest rates will rise as a result.
This same perspective seems applicable this time as well.
If measures to increase buyers are perceived by the market as an attempt to artificially suppress interest rates, it could undermine trust. If that happens, interest rates could rise, contrary to the intended goal.
That is precisely why I believe the Ministry of Finance is explaining it in terms of “diversifying holders” and “improving attractiveness” rather than setting interest rate levels as a target.
◆ My thoughts
Last time, I concluded by saying, “When you see interest rates mentioned in the news, first check whether it refers to short-term or long-term rates.”
This time, I would like to add one more step to that.
When you see news about long-term interest rates, try looking at “who is buying those government bonds.”
The Bank of Japan’s purchases are decreasing. Banks have limits. Overseas investors are fickle. Pension funds depend on stock prices. That leaves households.
However, the scale of the tax incentives has not yet been decided. Moreover, what the market is ultimately watching is trust in fiscal policy.
I intend to check what form the tax incentives for government bonds will take in the December tax reform outline.
Source (Nikkei Electronic Edition)
・Former Prime Minister Kishida cautious about tax incentives for individual government bonds; does not fit NISA objectives (October 12, 2026)
・Individual government bonds “5-year 2%” in the spotlight; superior to deposits due to interest rates and ease of use (Individual government bonds moving the market, Part 1, October 2026)
・Individuals are the last resort for government bond buyers; eyes on 1.1 quadrillion yen in cash and deposits (Individual government bonds moving the market, Part 2, October 2026)
・Individual money shifting from “savings to government bonds”; domestic bank stocks see fading benefits of high interest rates (September 2026)
・Issuance of individual government bonds at record pace due to rising interest rates; 60% increase year-on-year from April to August (September 2026)
・Tax incentives for individual government bonds could trigger a “100 trillion yen shift from deposits”; headwinds for regional finance (August 2026)
・Ministry of Finance and Financial Services Agency to request tax incentives for individual government bonds; cautious views within the ruling party (August 2026)
・Consideration of tax incentives for individual government bonds requested by Financial Services Agency and Ministry of Finance; presented at LDP subcommittee (August 26, 2026)
・Successive requests for policy tax cuts, including individual government bonds and wage increases; securing funding sources remains distant (August 31, 2026)
・Speculation of domestic shift in GPIF assets; overseas investors warn “bearishness on Japanese government bonds is dangerous” (July 24, 2026)
・Criticism of inheritance tax reduction proposal for government bonds; strong tax-saving appeal for the wealthy if included in NISA (July 2026)
・Voices calling for “GPIF reliance” for ultra-long-term bonds; estimated 7 trillion yen in rebalancing purchases due to high stock prices (July 16, 2026)
・Inheritance tax cut debate in LDP to increase individual government bond holdings; Democratic Party for the People suggests “NISA eligibility” (June 27, 2026)
・Ultra-long-term bonds seeking a bottom; supplementary budget is “within expectations,” expectations for unlocking individual money (May 28, 2026)
・Who is the next buyer of Japanese government bonds? “Expand products for individuals,” “Limits to ‘filling the gap’ by banks” (March 22, 2026)
・Three points on why ultra-long-term bonds crashed; participants are mainly professionals, reflecting fiscal risk (January 21, 2026)
・Bank of Japan decides to raise interest rates to 1.0%; reduction in government bond purchases to stop after April 2027 (June 16, 2026)
・Bank of Japan’s government bond purchase turning point; adjusting to stop reductions in spring 2027, considering market stability amid rapid interest rate hikes (June 10, 2026)
・Bank of Japan decides to reduce government bond purchases; from 6 trillion yen to 3 trillion yen per month (July 31, 2024)
・Bank of Japan “On the Review of the Monetary Policy Framework” (March 19, 2024)
・Bank of Japan “On the Conduct of Monetary Policy” (June 14, 2024)
・Bank of Japan “On the Change in the Guideline for Market Operations and the Decision on the Plan for Reducing the Purchase of Japanese Government Bonds” (July 31, 2024)
・Ministry of Finance “Frequently Asked Questions about Individual Government Bonds (Regarding Interest Rates)”
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