"Japanese Government to Raise Assumed Long-Term Bond Rate to 3% Amid Rising Interest Burden"

During the 2026 Fiscal Year Budget Formulation Process

Sanae Takaichi, Prime Minister of Japan. Yonhap News Agency

The Japanese government is reportedly planning to raise its assumed long-term government bond interest rate, used to calculate interest expenses in the fiscal 2026 (April 2026 to March 2027) budget process, to 3.0% per annum.

According to Reuters on the 24th, multiple sources stated that the Japanese government is coordinating to sharply increase the assumed government bond interest rate from 2.0% in the fiscal 2025 main budget, in response to the recent rise in market interest rates. If implemented, this would be the highest level in 29 years since fiscal 1997 (3.2%), the report explained.

Market interest rates have risen significantly compared to the beginning of the year. The yield on 10-year government bonds, a key long-term interest rate indicator, stood at around 1.1% at the start of this year but had already climbed to 2.1% as of December 22, marking the highest level in 26 years and 10 months since February 1999. This recent surge has been attributed to the Bank of Japan's policy rate hike and heightened caution over the expansionary fiscal policy of the Sanae Takaichi administration.

The main issue is the interest burden on the Japanese government. The government plans to issue a large volume of government bonds to finance its expansionary fiscal policy, but interest payments will also increase as rates rise.

According to local media such as NHK, the Japanese government is also pushing to issue government bonds worth over 1 trillion yen to strengthen the financial base of Nippon Export and Investment Insurance (NEXI) in connection with a $550 billion investment in the United States, which was pledged during trade negotiations concluded with the US in July.

The Yomiuri Shimbun reported, "In the fiscal 2025 main budget, government bond costs, including principal repayment and interest payments, amounted to 28.2 trillion yen, accounting for about one-fourth of total expenditures. Of this, interest payments alone reached 10.5 trillion yen, surpassing defense spending," adding, "The increase in interest payments makes it more difficult for the government to manage its finances."