The end of the era of low interest rates in Japan

Yields on government bonds in the world’s most developed markets are reaching their highest levels in recent years (see editorial above), with Japan leading the trend, where the 10-year yield has reached 3 per cent for the first time since September 1996. Just two years ago, the yield was less than 1 per cent, whilst at the start of 2022 it hovered around 0.1 per cent. It was precisely because of these rates that many analysts considered Japan’s enormous debt – around 200 per cent of GDP – to be sustainable. The country had become the example cited to argue that a state could continue to run deficits and accumulate debt without being punished by the markets. For decades, Japan was among the countries with the lowest yields in the world, partly because the central bank had maintained negative interest rates whilst simultaneously purchasing huge quantities of government bonds. But those days now seem to be a thing of the past: even Tokyo has been caught up in inflation and rising borrowing costs, with interest payments set to increase as old bonds are replaced by new ones offering higher yields.

The Bank of Japan has already cut interest rates to 1 per cent, and a further cut at this month’s next meeting is considered almost certain. In any case, the Japanese data also highlights the limitations of the intervention on the yen initiated at the end of July by US Treasury Secretary Scott Bessent. Yesterday, Japanese Finance Minister Satsuki Katayama continued to call for coordination on exchange rates, whilst Bessent described the yen’s latest decline as “fairly modest” and urged the Bank of Japan to raise rates. While the two officials were discussing currency policy, bond vigilantes imposed market discipline. At yesterday’s auction, a spike was recorded that had not been seen for 30 years and which appears to mark the end of the era of ultra-low Japanese interest rates.