Japan's government bond Intrerest Rate has surpassed 2.1%... reaching a new high in 26 years.

The representative long-term interest rate indicator in Japan—the 10-year government bond yield—soared to an annual interest rate of 2.1%, reaching a new high in 26 years. Recently, after the Bank of Japan raised the benchmark interest rate, combined with concerns over increased fiscal spending and the weakening yen, market interest rates are rising rapidly.

On December 19, the Bank of Japan raised its existing Benchmark Interest Rate from “about 0.5%” to “about 0.75%”. This marks the highest level in 30 years and is seen as a significant turning point for Japan's monetary policy, which has maintained an ultra-low interest rate stance for a long time. After the increase in the Benchmark Interest Rate, government bond yields also rose, particularly the 10-year government bond yield, which reflects long-term rates, hitting 2.1% during the session, the highest record since February 1999.

Another background to the rise in interest rates is the market's vigilance towards the Japanese government's large-scale expansionary fiscal policy. The cabinet led by Prime Minister Suga Yoshihide is currently planning to add a supplementary budget, which may increase the issuance of government bonds. Concerns over the increase in issuance typically become a factor that stimulates market interest rates. In addition, the Bank of Japan's interest rate hikes have failed to reverse the ongoing weakness of the yen, and the market expects that there may be larger additional interest rate hikes in the future.

On the other hand, the yen exchange rate has still not been able to escape its weakness. In the Tokyo foreign exchange market on the afternoon of the 22nd, the yen was quoted at 157.3 yen per dollar, up 0.62 yen from the weekend. This simultaneously exacerbates the pressure of rising import prices in Japan and the possibility of overseas investors withdrawing. Kanda Masato, the head of foreign exchange policy at the Japanese Ministry of Finance, verbally intervened in the morning, expressing concerns about a sharp one-sided fluctuation in the exchange rate, but the actual impact was limited.

It is widely believed both inside and outside the market that the current situation of Japan's interest rates and exchange rates has formed a complex interwoven scenario. The reason lies in the fact that the increase in the Benchmark interest rate has not fully met market expectations, while factors such as the government's fiscal expansion plan have triggered additional pressure for interest rate hikes. If Japan's interest rate policy and monetary policy do not shift towards a more proactive trajectory, the depreciation of the yen and the trend of rising long-term interest rates may be difficult to reverse easily.

This trend may have conflicting long-term and short-term effects on Japan's overall economy. While it benefits export companies, it may also accompany the side effects of rising long-term funding costs and shrinking domestic demand. The policy response from Japanese authorities is receiving unprecedented attention.