Japan Faces Growing Economic Strain as Long-Term Rates Climb

Long-term interest rates, often described as a gauge of the economy’s condition, can have both positive and negative effects. Higher rates can increase household income from savings and other interest-bearing assets, but they can also make borrowing more expensive and discourage the flow of money through the economy.

Data show that if long-term interest rates and related borrowing costs rise by 0.5 percentage point, more than 5,600 additional small and midsize companies could become unprofitable.

The Bank of Japan is scheduled to hold a two-day monetary policy meeting on September 17 and September 18 as persistent inflation continues to complicate the outlook for interest rates.

If the central bank is seen as moving too slowly to raise rates despite continuing price increases, concerns that delayed action could harm the economy may intensify, making long-term interest rates more likely to rise.

Without a clear message from the Bank of Japan about the pace of further rate increases, upward pressure on long-term yields could continue. Attention is therefore expected to focus on comments by Bank of Japan Governor Kazuo Ueda on September 18.

Long-term interest rates have already risen sharply in both Japan and the United States.

In Japan’s bond market, the yield on the benchmark 10-year government bond temporarily returned to the 3% range.

In the United States, long-term interest rates briefly climbed into the 5% range, their highest level since October 2023, as rising crude oil prices fueled expectations that inflation could accelerate.

The increase in U.S. yields has also contributed to upward pressure on Japanese interest rates.

Expectations have strengthened that the U.S. Federal Reserve could raise interest rates to curb inflation, adding further upward pressure to long-term borrowing costs.

Source: FNN