Japan must choose between cheap money and a livable yen
The BOJ must decide whether to counter inflation through higher rates or preserve ultralow borrowing costs despite the strain on households.
Japan's 10-year government bond yield has recently hit 3%, the highest level since 1996. Despite still being lower than yields in the U.S. and Europe, the rapid rise of around 2 percentage points within two years is noteworthy. This long-term yield can be broken down into anticipated short-term rates and a term premium, with my calculations from Bank of Japan estimates in August 2026 attributing roughly half of the increase to each factor.
Quantitative tightening, or the reduced BOJ purchases of Japanese government bonds since August 2024, accounts for only 30% of the term-premium increase. The rest is likely due to banks and insurers' limited ability to take on more JGBs, coupled with growing worries about Japan's fiscal situation. These factors are closely tied to the yen's weakening.
Following the dollar's approach to ¥164 in late July, coordinated Japan-U.S. intervention managed to bring it down to the ¥155 range briefly. However, it soon rebounded to near ¥159 by late August. At the Jackson Hole economic conference, Federal Reserve Chair Kevin Warsh emphasized price stability above all else, stating that U.S. inflation had stayed above the 2% target for too long. His hawkish stance temporarily pushed the dollar back above ¥160.
Written by urgent.news from Japan Times's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
