Long-term interest rates exceed 3% for the first time in 30 years (Basic explanation) – Why are Japanese interest rates rising now?
I wrote an article just before this one about what the government should do now that long-term interest rates have exceeded 3% for the first time in 30 years.
However, why are interest rates rising in the first place? If you don’t understand this, the rest won’t make sense, so I am writing this article just in case.
The current rise in Japanese interest rates is not caused by a single factor. Broadly speaking, there are four overlapping factors:
1. Rising prices
2. The Bank of Japan’s monetary policy
3. Rising overseas interest rates
4. Caution regarding the government’s fiscal management
.
What is a “long-term interest rate” in the first place?
In the news, “long-term interest rate” generally refers to the yield on 10-year government bonds.
Government bonds are issued by the government to borrow money.
For example, if you lend 1 million yen to the government for 10 years, you can lend it at a low interest rate if prices barely rise.
However, what if you expect prices to rise every year from now on?
The value of the 1 million yen returned in 10 years will be lower than it is now. In that case, investors think, “It won’t be worth it unless I get a higher interest rate.”
1. The premise that “prices will not rise” has collapsed
For a long time, Japan has experienced deflation or low inflation.
Because of this, the economy has operated on the premise that “prices and interest rates in Japan will hardly rise.”
However, that situation is changing.
The market has become aware of the possibility that price increases will continue through wage hikes, raw material prices, energy prices, and rising import prices due to the weak yen.
In other words, the Japanese economy itself is shifting from a “world where prices do not rise” to a “world that assumes prices will rise”.
Naturally, the interest rate demanded by investors buying government bonds also becomes higher.
2. The era of the Bank of Japan suppressing interest rates has ended
Another major factor is the Bank of Japan’s monetary policy.
In the past, the Bank of Japan kept interest rates at a very low level through ultra-low interest rate policies and massive purchases of government bonds.
However, with prices rising, that policy cannot be continued indefinitely.
If the Bank of Japan raises its policy interest rate, interest rates on bank deposits and in the short-term money market will also rise.
Furthermore, the market anticipates the future, wondering if the Bank of Japan will continue to raise rates. As a result, long-term interest rates, such as those on 10-year government bonds, also rise.
3. High interest rates overseas, such as in the United States
You cannot understand current movements by looking only at Japanese interest rates. Global financial markets are interconnected.
For example, if U.S. Treasury bonds offer high interest rates while Japanese government bonds offer extremely low rates, the appeal of holding Japanese government bonds for investors decreases relatively.
If Japanese government bonds are sold off, bond prices fall, and conversely, yields rise.
In other words, there is an aspect where the wave of global interest rate hikes is also washing over Japan.
4. And one thing that cannot be ignored is “fiscal policy”
This is where the issue becomes extremely important for Japan’s future.
If the government continues large-scale spending and relies on issuing government bonds to fund it, the amount of government bonds circulating in the market will increase.
If the supply of government bonds increases, it becomes difficult to attract buyers unless higher interest rates are offered.
Furthermore, if the market begins to question how this country will rebuild its finances in the future, it may become conscious of the risks of holding government bonds and demand higher interest rates.
Rising interest rates are directly linked to our lives
The issue of interest rates is not just about the financial market.
Mortgage interest rates will rise. The cost for companies to borrow money will also rise. The interest payments the government pays on government bonds will also increase.
If the country’s interest payments increase, the financial resources available for social security, education, defense, and childcare support will be squeezed by that amount.
Here, I will explain the impact using mortgages, which are the most affected part of our lives, as an example.
Until a few years ago, it was not uncommon for variable mortgage rates to be at a very low level of around 0.3% to 0.5%.
However, as of September 2026, variable rates at major banks have generally risen to around 1% to 1.5%. For 10-year fixed rates, levels of the mid-3% range can be seen, and for full-term fixed rates such as 35 years, levels of the 3.5% to 4% range are also seen.
In other words, we are already moving away from the “era where we hardly had to be conscious of interest rates.”
For example, if you perform a simple calculation for a 50 million yen loan over 35 years with equal principal and interest payments, the monthly payment is approximately 130,000 yen at an interest rate of 0.5%.
If this rate rises to 1.5%, it becomes approximately 153,000 yen; at 2%, it is approximately 166,000 yen; and at 3.5%, it is approximately 207,000 yen.
Even just going from 0.5% to 1.5% results in a difference of approximately 23,000 yen per month, or about 280,000 yen per year.
Of course, with actual variable-rate mortgages, the methods for reviewing interest rates and the rules for changing repayment amounts differ by bank, so a rise in interest rates is not necessarily reflected in repayment amounts immediately in this way.
Even so, the basic structure that a rise in interest rates increases the burden on household finances remains unchanged.
What is even more important is that it is not just about mortgages.
The interest rates at which companies borrow money will also rise. If the burden of interest payments for companies increases, they may refrain from investing in new equipment or stores, or be forced to pass the costs on to product prices.
Regarding real estate as well, if interest rates rise, the amount of mortgage one can borrow with the same annual income decreases. As a result, if the number of people who can buy homes decreases, downward pressure is also applied to real estate prices.
And the same applies to the country. Households have mortgages, companies have bank loans, and the government has government bonds. Although the methods of borrowing differ, they share the common point that “if interest rates rise, the burden of interest payments increases.”
In Japan until now, because ultra-low interest rates continued for so long, households, companies, and the government have all made various decisions based on the premise of a “world with almost no interest rates.”
That premise is now beginning to change significantly.
That is precisely why the news about what percentage long-term interest rates have reached is not just a technical matter for the financial markets.
It is a problem that affects our very lives, influencing mortgage repayments, corporate investment, housing prices, and even the nation’s finances.
Even if interest rates rise, can’t we just pay the increased interest with government bonds?
Here, setting aside personal interest rates like mortgages, there is the following question often raised regarding government bond interest rates.
“The principal of government bonds can just be refinanced. Even if interest rates rise and interest payments increase, couldn’t we just issue new government bonds for that increased amount?”
Certainly, that is possible.
For example, if the interest rate on 100 trillion yen in government bonds is 0.5%, the annual interest payment is 500 billion yen. If the interest rate becomes 3%, it becomes 3 trillion yen.
The difference is 2.5 trillion yen.
So, one could think that we should just cover this 2.5 trillion yen by issuing new government bonds.
The problem is what happens if you continue to do that every year.
The government bonds issued to pay interest also accrue interest. If rising interest rates gradually spread to all government bonds, interest payment costs will increase further, and if those are covered by issuing more government bonds, the balance of government debt will swell.
Even so, if there are people willing to buy government bonds, it can be continued.
Then, if there are not enough buyers in the market, shouldn’t the Bank of Japan just buy the government bonds?
This is also technically possible. Since Japanese government bonds are basically denominated in yen, the government being unable to procure yen itself is not the essential problem.
In fact, to escape deflation, the Bank of Japan has for many years purchased large amounts of government bonds and implemented large-scale monetary easing to keep interest rates low. In an era when raising prices itself was a policy objective, that was a means to escape deflation.
However, we are now in a phase where rising prices and a weak yen are becoming problems.
In this situation, if the government covers the ever-increasing interest payments by issuing government bonds, and the Bank of Japan continues to buy those bonds in large quantities to keep interest rates down, it means continuing monetary easing. If that goes too far, it could further strengthen the yen’s depreciation and inflation.
In other words, paying increased interest with government bonds is not immediately a problem in itself. The problem is that it cannot be continued indefinitely.
The government can issue government bonds. The Bank of Japan can supply yen.
However, being able to create yen and being able to maintain the value of the yen are two different things.
If government bond issuance and currency supply significantly exceed the economy’s supply capacity, it will ultimately result in a decline in real wages and the value of savings in the form of a weaker yen and rising prices, placing a burden on people’s lives and corporate activities.
Therefore, the real fear of rising interest rates is not that “the government will suddenly be unable to repay its government bonds.”
If the increased interest payments are covered by taxes, the financial resources available for other policies will decrease. If they are covered by government bonds, debt will increase further. And if the Bank of Japan continues to support this by purchasing government bonds, it could ultimately become a burden on the public in a different form: a weaker yen and inflation.
Rising interest rates are a problem that forces the government to make such choices.
Japan has returned to a “world with interest rates”
If I were to describe what is happening now in one word,
it is that the Japanese economy has returned from a “world without interest rates” based on deflation to a “world with interest rates” based on inflation.
I think that is what it is.
This is not necessarily a bad thing. Interest rates also rise in the process of wages and prices rising moderately and the economy normalizing.
The question is whether interest rates are rising due to economic growth, or due to anxiety over inflation and public finance. Even though both are “interest rate hikes,” these two have completely different meanings.
What is required of the government from now on is not simply to fear rising interest rates.
Make investments that lead to growth. At the same time, thoroughly review existing expenditures and tax systems. And through regulatory reform, create an environment where private companies can invest and grow without the government distributing money.
Decide not only “what to spend money on,” but also “what to stop doing.”
In Japan, which has entered an era of interest rates, that is precisely the important perspective required for the government’s economic policy.