Japan is Dragging the World Down

Japan's 30-year bond yield has surpassed 3% for the first time, triggering global alarms. Nomura states that the source of this global long-term interest rate rise is Japan itself—fiscal expansion out of control and expectations of central bank interest rate hikes have made fiscal risk premiums the biggest driving force. Even more concerning for the market is that the continuous rise in Japanese bond yields threatens not only the balance sheets of global financial institutions but may also burst the AI tech stock bubble, igniting a sudden economic slowdown.

Written by: Zhao Ying, Wall Street Journal

Japan's bond yield has surpassed 3% for the first time in 30 years. Nomura Research warns that the source of this global long-term interest rate rise is Japan, not external factors. The combination of Japan's fiscal risks and expectations for monetary policy normalization is spreading through the bond market globally, posing systemic threats to tech stocks, AI investments, and even the real economy.

The yield on 10-year Japanese government bonds (JGB) briefly exceeded 3.0% in the Tokyo market, marking the first time since September 1996. According to trading data, Takahide Kiuchi, an executive economist at Nomura, pointed out in a recent report that over the past year, the 10-year Japanese bond yield has risen by about 1.4 percentage points, while the increase in the U.S. 10-year Treasury yield during the same period was only about half that of Japan, indicating that the rise in Japanese bond yields is primarily driven by domestic factors rather than transmitted from overseas markets.

Takahide Kiuchi believes that in terms of absolute yield levels, Japanese bonds have reached a 30-year high, while U.S. bonds have only returned to levels not seen since January 2025. The yield on German 10-year government bonds is at its highest since 2011, and the yield on British 10-year government bonds is at its highest since 2008. Overall, Japan is more likely to be the source driving the rise in global long-term interest rates rather than a passive follower. Meanwhile, the Trump administration has begun to intervene unusually in Japan's economic policy, pressuring the Bank of Japan to raise interest rates and urging the government to reduce fiscal expansion.

Three Factors Driving Japanese Bond Yields Above 3%

According to Nomura's report, the 10-year Japanese bond yield approached the 3% mark in August and finally broke through this threshold during trading on September 1, driven by three main factors.

First, expectations for U.S. Federal Reserve interest rate hikes have intensified. Federal Reserve Chairman Kevin Warsh's recent statements at the Jackson Hole annual meeting have strengthened market expectations for a rate hike at the Fed's September Federal Open Market Committee (FOMC) meeting, putting pressure on global bond markets.

Second, expectations for interest rate hikes by the Bank of Japan have also increased. The market generally expects the Bank of Japan to raise policy rates at its September monetary policy meeting, further pushing up Japanese bond yields.

Third, the risk of fiscal expansion in Japan has intensified. As of the end of August, the total amount of general accounting budget requests submitted by Japanese ministries for the fiscal year 2027 exceeded the 2026 fiscal year budget by about 20 trillion yen, significantly heightening market concerns about the deterioration of Japan's fiscal situation.

Fiscal Risk is the Main Cause of Yield Rise

Nomura has conducted a decomposition analysis of the 1.4 percentage point rise in the 10-year Japanese bond yield over the past year. The results show that rising inflation expectations contributed about 0.49 percentage points, changes in the proportion of Japanese government bonds held by the Bank of Japan contributed about 0.08 percentage points, the rise in U.S. 10-year Treasury yields contributed about 0.08 percentage points, and changes in actual policy rate expectations contributed about 0.15 percentage points, while 'other' factors contributed as much as 0.60 percentage points—this is believed to primarily reflect the risk premium associated with the deterioration of Japan's fiscal situation.

This indicates that among all the factors driving the rise in Japanese bond yields, the fiscal risk premium is the largest single contributor, far exceeding the impacts of inflation expectations and monetary policy expectations.

Takahide Kiuchi points out that a rise in long-term interest rates is not always a 'bad thing'—if it is driven by improved economic growth potential or rising inflation expectations, actual rates may not necessarily rise, limiting negative impacts on the economy. However, if the rise is primarily due to fiscal risks, it often has substantial negative effects on economic activity, and this impact is usually more delayed and harder to detect than that of rising short-term rates.

Trump Administration's Rare Intervention in Japanese Economic Policy

The Trump administration has begun to intervene in Japanese economic policy in unusual ways. U.S. Treasury Secretary Mnuchin recently made it clear to Japan's Finance Minister Taro Aso and Bank of Japan Governor Haruhiko Kuroda at the G20 finance ministers and central bank governors meeting that Japan needs to clearly communicate its path to fiscal sustainability and interest rate hike plans.

Previously, Mnuchin had publicly expressed expectations for the Bank of Japan to raise interest rates after the end of the U.S.-Japan joint currency intervention at the end of July. Nomura believes that the logic behind this move by the Trump administration is that the continuous depreciation of the yen and the decline in Japanese bond prices (rising yields) could negatively impact the U.S. and even global markets. Therefore, Washington is seeking to more actively intervene in Japan's economic policy direction, pushing the Bank of Japan to raise interest rates and urging the government to reduce its stance on fiscal expansion.

The report notes that if the Japanese government gradually adjusts its proactive fiscal policy stance, the risk of fiscal deterioration in Japan will decrease, and the upward pressure on the 10-year Japanese bond yield will also ease accordingly.

Rising Japanese Bond Yields May Trigger Global Financial Market Turmoil and Cool Down AI Boom

Nomura warns that the rise in global long-term interest rates, originating from Japan, should not be underestimated in terms of its potential impact on the economy and financial system.

From a macro perspective, rising long-term interest rates will increase interest expenses for governments worldwide, potentially triggering a negative spiral of 'fiscal deterioration—yield rise,' while also lowering the market value of bonds in financial institutions' asset portfolios, shaking their balance sheet stability. Additionally, rising rates will suppress the prices of risk assets such as real estate and stocks.

Particularly concerning are tech and AI-related stocks, which are especially sensitive to rising interest rates. Takahide Kiuchi points out in the report that if the rise in long-term interest rates centered around Japan continues, it may trigger a cooling of the AI boom in the stock market. A decline in the prices of AI-related stocks will further weaken the ability of related companies to raise large-scale investment funds through equity or debt financing, thereby putting the brakes on the expansion of physical asset investments in AI infrastructure.

'This may not just be a gradual cooling of global economic activity, but could potentially trigger a sudden economic slowdown,' the report states. Nomura believes this partly explains why the Trump administration has chosen to take the rare step of direct intervention, urging Japan to move away from policies that could further depreciate the yen and push up long-term yields.