Surprise Rise in Long-Term Bond Interest Rates in Japan: What Does It Mean for Investors and the Stock Market?

For the first time in eleven years, long-term bonds have risen above 1 percent, catching investors off guard. Japan’s monetary policy has reached a significant milestone as the interest rate on ten-year government bonds (JGB) surpassed 1 percent for the first time in over a decade. The Bank of Japan had kept the interest rate on long-term bonds at 0 percent for several years, making this increase to 1 percent surprising.

The rise in interest rates is due to the Bank of Japan buying fewer government bonds on the market recently, leading to pressure to slow down the decline of the yen. The central bank holds around 50 percent of JGBs, meaning even small policy changes have a considerable impact on the market. Investors are now questioning whether rising interest rates will put an end to the yen’s weakness and affect the stock market, which has been performing exceptionally well.

Despite predictions that higher interest rates could lead to negative real interest rates in Japan due to inflation, this is not yet happening. The BoJ has set key interest rates for short-term bonds at 0 to 0.1 percent, allowing companies to continue benefiting from cheap borrowing. The real estate market remains largely unchanged by this rise in JGB rates since it depends mainly on short-term bond interest rates.

While some experts predict that JGB interest rates might reach 2 percent by 2025 if the economy continues to grow, there is still uncertainty about how this will impact the stock market. Japanese stocks have thrived under weak exchange rates but may face risks if there is a shift in exchange rates due to rising interest rates or other factors such as inflation, corporate governance reforms or foreign investment.