Market interest rates are also on the rise as the Bank of Japan is likely to raise its benchmark int..

Market interest rates are also on the rise as the Bank of Japan is likely to raise its benchmark interest rate at the financial policy-making meeting to be held from the 18th to the 19th.

The 10-year Treasury yield, a leading indicator of long-term interest rates, is on the verge of reaching 2% for the first time in 20 years. As market interest rates rise, the interest burden on the Japanese government, which issued large-scale government bonds, is expected to increase.

According to the Nihon Keizai Shimbun (Nikkei) on the 9th, the 10-year national interest rate in the Japanese bond market recorded 1.96%, just around the corner of the 2% range.

It will be the first time in 19 years and 7 months that the 10-year interest rate has exceeded the 2% range since May 2006. In the financial market, the Bank of Japan is expected to raise the policy rate from the current 0.5% to about 1.4 percentage points.

It is the Japanese government’s interest burden that becomes a problem as long-term interest rates rise. The Japanese government is currently issuing government bonds worth more than 1,100 trillion yen (about 1.370 trillion yen), and interest payments increase as interest rates rise.

According to Japan’s Finance Ministry estimates, the 10-year Treasury bond rate will rise from 2% in 2025 (April 2025 to March 2026) to 2.5% in 2028. In this case, interest payments on government bonds are expected to nearly double from 7.9 trillion yen (about 74.5 trillion won) in 2024 to 16.1 trillion yen (151.8 trillion won) in 2028.

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Even if interest rates go sideways from 2028, interest payments in 2034 are expected to exceed 25 trillion yen (about 235 trillion won).

If the interest rate on government bonds rises 1 percentage point higher than expected, interest payments are expected to exceed 34 trillion yen (about 320 trillion won) in 2034. This is equivalent to the social security expenses currently spent by the Japanese government.

Nikkei said, “Even if interest payments increase, economic growth will continue and fiscal sustainability will be maintained if it can be covered by increased tax revenues,” adding, “However, the key is whether the growth rate will continue to exceed interest rates.”

In the meantime, local banks, which have been managing funds with long-term government bonds in an environment of low-interest rates, are expected to be victims of interest rate hikes. This is because the price of bonds held falls when interest rates rise.

Since this is an accounting loss, there is no problem if the bond is held until maturity. However, holding bonds that incur losses until maturity at a time when interest rates are rising is a problem that can negatively affect many areas, including fund management.

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Finally, the obstacles to households purchasing homes also rise. If 50 million yen (about 470 million won) is borrowed at the current interest rate of 2%, the final repayment amount will be 69 million yen (about 650 million won). If the interest rate is 1% in the past, it is 59 million yen (about 556 million won), so you have to pay 10 million yen more. If calculated by monthly repayment, the burden will increase by 25,000 yen (about 236,000 won).

Nikkei said, “It is common for deposits to have a large number of elderly people and a large number of young people,” adding, “As interest rates rise, the burden on young people becomes relatively heavy.”

Interest burden on companies will also increase. If a company’s borrowing interest rate rises by 0.25 percentage points, the interest burden will increase by 680,000 yen (about 6.4 million won) per year per company. This acts as a factor that lowers corporate ordinary profit by an average of 2.1 percentage points. In the case of companies with high debt dependence, competitiveness deteriorates.