Japan’s 10-year government bond (JGB) yield briefly moved above 3.0% in Tokyo trading, the first time since September 1996. In a recent report, Nomura Research Institute executive economist Takahide Kiuchi said the 10-year JGB yield has risen by about 1.4 percentage points over the past year, while the increase in the U.S. 10-year Treasury yield over the same period was only about half as large, a sign that the move in Japan has been driven mainly by domestic factors rather than transmission from overseas markets.
Nomura says Japan is likely the source of the global move in long-end yields
Kiuchi said that in absolute terms, Japanese bond yields are now at a 30-year high, while U.S. Treasury yields have only returned to levels last seen in January 2025. Germany’s 10-year government bond yield is at its highest since 2011, and the UK 10-year government bond yield is at its highest since 2008. Taken together, Nomura Research Institute said Japan is more likely to be the source of the global rise in long-term yields than a passive follower.
According to the report, cited by Trading Platform Chasing Wind, the Trump administration has also started intervening in Japanese economic policy in an unusual way, pressing the Bank of Japan to raise rates and pressing the Takaichi government to rein in fiscal expansion.
Three factors pushed the 10-year JGB yield through 3%
Nomura said the 10-year JGB yield had already approached the 3% threshold in August and finally broke through that level intraday on Sept. 1. The report pointed to three drivers.
- First, expectations for a Federal Reserve rate hike strengthened. Remarks by Federal Reserve Chair Kevin Warsh at the recent Jackson Hole symposium reinforced market expectations for a rate increase at the Fed’s September Federal Open Market Committee meeting, putting pressure on global bond markets.
- Second, expectations for a Bank of Japan rate hike increased. Markets widely expect the BOJ to raise its policy rate at its September monetary policy meeting, adding to upward pressure on JGB yields.
- Third, concern over Japanese fiscal expansion intensified. As of the end of August, budget requests submitted by Japanese ministries and agencies for fiscal 2027 were about JPY 20 trillion higher than the fiscal 2026 budget, sharply increasing concern over a deterioration in Japan’s fiscal position.
Fiscal risk was identified as the main driver
Nomura broke down the causes behind the 1.4 percentage-point rise in the 10-year JGB yield over the past year. Higher inflation expectations accounted for about 0.49 percentage points, changes in the BOJ’s share of JGB holdings accounted for about 0.08 percentage points, the rise in the U.S. 10-year Treasury yield accounted for about 0.08 percentage points, and changes in expectations for the real policy rate accounted for about 0.15 percentage points. The “other” category contributed as much as 0.60 percentage points.
The institute said that category mainly reflects a risk premium tied to worsening Japanese fiscal conditions. In other words, among all the forces pushing yields higher, the fiscal risk premium was the largest single contributor, well above the effect of inflation expectations and monetary policy expectations.
Kiuchi said rising long-end rates are not always negative. If yields rise because growth potential improves or inflation expectations increase, real rates do not necessarily move up in parallel, and the drag on the economy can be limited. If the increase is mainly driven by fiscal risk, however, the effect on economic activity is usually materially negative, more delayed than a rise in short-end rates, and harder to detect.
Trump administration has directly pressed Japan
The report said the Trump administration has begun intervening in Japanese economic policy in an unusual manner. At a recent G20 meeting of finance ministers and central bank governors, U.S. Treasury Secretary Bessent told Japanese Finance Minister Satsuki Katayama and BOJ Governor Kazuo Ueda that Japan needs to clearly communicate its path for fiscal sustainability and its plans for rate hikes.
Earlier, after the end of the joint U.S.-Japan foreign exchange intervention in late July, Bessent had already publicly expressed his expectation that the BOJ would raise rates. Nomura said the logic is that continued yen weakness and falling JGB prices, which means rising yields, could hurt U.S. and global markets. Washington is therefore seeking to shape the direction of Japanese economic policy more actively by pushing the BOJ toward higher rates and urging the Takaichi government to scale back fiscal expansion.
The report added that if the Takaichi government gradually adjusts its pro-fiscal-expansion stance, the risk of fiscal deterioration in Japan would decline, and upward pressure on the 10-year JGB yield would ease as well.
Technology shares and AI investment singled out
Nomura warned that a global rise in long-term yields with Japan as the epicenter could have a larger-than-expected impact on the economy and the financial system.
At the macro level, higher long-end rates would increase governments’ interest costs and could trigger a negative spiral of fiscal deterioration followed by higher yields. They would also reduce the market value of bonds held in financial institutions’ portfolios, weakening balance-sheet stability. Risk assets including real estate and equities would also face pressure.
The report paid special attention to technology and AI-related shares. Those assets are especially sensitive to higher rates. Kiuchi said that if the rise in long-end yields centered on Japan continues, it could cool the AI boom in equity markets. A decline in AI-related stock prices would weaken the ability of those companies to raise large amounts of money through equity or debt financing, which would in turn slow the expansion of physical asset investment in AI infrastructure.
The report said, 「This may not be just a gradual cooling in global economic activity, but could trigger a sudden economic slowdown.」 Nomura added that this also helps explain why the Trump administration chose to take the unusual step of direct intervention, urging Japan away from policies that could weaken the yen further and push long-end yields even higher.