In Japan, the interest rate on long-term bonds has risen above 1 percent for the first time in eleven years. This milestone was reached when the interest rate on ten-year government bonds (JGB) rose to 1.005 percent. The Bank of Japan had kept the interest rate at 0 percent from 2016 to 2022, and the unexpected rise was described by bond analyst Kazuhiko Sano as a surprise.
The increase in interest rates was due to the Bank of Japan buying fewer government bonds than usual since last week, in a reaction to growing pressure to slow the decline of the yen. Martin Schulz, an analyst, highlighted that low interest rates in Japan compared to other countries had led to sustained weakness of the yen, prompting the Bank of Japan to test market reactions to higher long-term interest rates.
The impact of higher interest rates on the economy is currently small as real interest rates remain negative in Japan due to inflation. However, rising interest rates could potentially affect weakness of the yen and record-breaking performance of stock market. Despite this increase in interest rates, most mortgages have flexible interest rates dependent on short-term bonds, and therefore real estate market is not greatly affected.
There is still uncertainty among investors about future interest rates on ten-year JGBs. Some analysts believe that if economy returns solid growth by 2025, it could rise up to 2 percent while others are more cautious citing liquidity in market and slow reduction of Bank of Japan’s balance sheet as factors that could keep it from rising significantly above 1 percent.
Overall Japanese stocks have benefited from weakness of Yen but there are concerns about how rising interests might affect it. Despite uncertainty some analysts believe that with factors like higher inflation and corporate governance reforms driving it upwards, Japanese stocks may continue their upward trend while others suggest that Japan may not outperform other markets regionally due to this change in monetary policy direction .
