OPINION:  Higher long-term rates in Japan, what it means for the economy

Japan’s long-term interest rates have returned to levels unseen in decades, marking a structural shift for an economy long defined by near-zero borrowing costs. Yields on newly issued 10-year Japanese government bonds (JGBs) climbed into the 2% range in December 2025, the highest level in 26 years and 10 months, extending a steady rise that began in 2023. 

The move has been broad-based. Two-year yields reached 1.12%, the highest since 1996; five-year yields hit 1.52%, the highest since 2008; and 20-year yields climbed to 3.02%, the highest since 1999. In an economy conditioned to ultra-low rates, interest is once again a price.

Why rates are rising

Monetary normalization is the first driver. Since 2024, the Bank of Japan has dismantled the pillars of its ultra-easy stance. It ended negative interest rates and yield-curve control in March 2024, began tapering bond purchases in July, and raised its policy rate in stages to 0.75% by December 2025. As the BOJ steps back from bond buying, market forces are reasserting themselves, and investors are demanding a term premium to compensate for uncertainty and fiscal risk.

Fiscal expansion is the second. The Takaichi government has leaned on stimulus rather than austerity, approving a large supplementary budget and a broader stimulus package funded heavily through new bond issuance. With the BOJ no longer acting as a dominant buyer, heavier supply is adding upward pressure on yields, while markets question whether cash-based support and utility subsidies address Japan’s longer-term growth constraints.

What it means 

Rising long-term rates carry two messages.  

First, they suggest Japan may finally be moving beyond deflation. Inflation has stayed above 2%, and wage gains are increasingly cited by policymakers as evidence of a nascent price-wage cycle. In that sense, higher yields reflect a healthier — if unfamiliar — macro environment. 

Second, they introduce new risks. Higher yields raise debt-servicing costs for a heavily indebted government, lift corporate financing costs, and create valuation losses for financial institutions holding large JGB portfolios. For households, higher mortgage rates threaten to weigh on consumption and housing demand.
 
The policy dilemma ahead 

The key argument is that Japan is no longer a demand-starved economy. With labor shortages and capacity constraints emerging, demand-heavy fiscal stimulus risks fueling prices rather than growth. The priority, the author argues, should shift toward supply-side reform — easing labor bottlenecks, lifting productivity, and fostering new industries — while financial institutions, companies, and households adapt to a world where interest rates once again matter. 

Whether Japan can complete its transition to a “normal” interest-rate economy will depend on how effectively each sector adjusts to this long-awaited return of price signals. 

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