TOKYO - Japan's long-term interest rates surged on Sept. 1, hitting 3 percent for the first time in about 30 years.
Although it had been expected to reach 3 percent soon, the move came somewhat earlier than anticipated. The rate was around 2.1 percent at the start of 2026, meaning it rose 0.9 percentage point in just eight months. The pace of the increase is fast.
While higher rates overseas, including in the United States, have contributed to the rise in Japan, what appears to be a greater driver is domestic concern over increased deficit-financing bond issuance on the back of Prime Minister Sanae Takaichi's push for expansionary fiscal policy.
For the fiscal 2027 general account budget, the Finance Ministry received requests totaling more than 143 trillion yen ($906 billion) by the Aug. 31 deadline, a record high and a sharp increase from more than 122 trillion yen for fiscal 2026.
As the initial fiscal 2026 budget was roughly in line with requested spending, the fiscal 2027 initial budget could also come in at around 143 trillion yen.
Even allowing for inflation-driven tax revenue gains, the fiscal deficit could reach about 43 trillion yen, about 10 trillion yen higher than the more than 32 trillion yen projected at the fiscal 2026 supplementary-budget stage.
The government would need to issue more government bonds to cover the shortfall, which would make higher interest rates inevitable.
There are also other worries regarding fiscal conditions.
The government has decided to cut the consumption tax rate on food and beverages to 1 percent for two years from April 2027. Takaichi has said she intends to secure about 5 trillion yen in annual funding without relying on deficit-financing bonds. If that funding cannot be secured, however, bond issuance could swell to nearly 50 trillion yen.
Consumer price inflation has trended near 3 percent since fiscal 2022, so long-term rates topping 3 percent would not be a surprise. Long-term rates in every other Group of Seven country exceed 3 percent, with Germany, which has the next-lowest rate after Japan, at about 3.5 to 3.6 percent. Given Japan's poor fiscal position, its rate could plausibly rise into the mid-3-percent range.
On the other hand, it is the public who will bear the cost of declining fiscal credibility through higher borrowing costs and a weaker yen, which fuels inflation.
If long-term rates remain in the 3 percent range, they could particularly chill capital investment, a key economic pillar after private consumption, contradicting the government's goal to see public-private investment reach more than 370 trillion yen by fiscal 2040.
To keep long-term rates below 3 percent, Japan must strengthen confidence in its finances. Limiting the fiscal 2027 initial budget to about 130 trillion yen during budget talks through year-end and clearly identifying funding for the consumption-tax cut would be crucial. Restraining spending could also ease downward pressure on the yen and curb inflation.
Hideo Kumano, born in Yamaguchi in 1967, is an economist who heads the ABC Economic Research Institute in Tokyo. A graduate of Yokohama National University's Department of Economics, he worked for the Bank of Japan and later joined what was then known as the Dai-ichi Life Research Institute. He assumed his current post in July 2026. He specializes in fiscal and monetary policy.
