Japan’s monetary policy has reached a significant milestone with the interest rate on ten-year government bonds (JGB) rising above 1 percent for the first time in over a decade. This increase, which was unexpected by investors, has put pressure on the Bank of Japan to slow the decline of the yen and buy fewer government bonds on the market. The big question for investors is whether this rise will end the yen’s weakness and impact the stock market, which has seen record-breaking performance.
Although the impact of higher interest rates on the economy is currently minimal, Japan’s real interest rate remains negative due to inflation. With the BoJ setting the key interest rate for short-term bonds at 0 to 0.1 percent, companies continue to benefit from cheap borrowing. Despite assumptions that interest rates on ten-year JGBs might rise to 2 percent by 2025 if the economy grows, factors such as inflation, corporate governance reforms, and foreign investment also play a role in shaping the future of the Japanese stock market.
The rise in interest rates can be attributed to several factors including changes in monetary policy and fluctuations in foreign exchange markets. For instance, when countries reduce their monetary stimulus or raise their benchmark rates, it can lead to an increase in long-term bond yields as investors demand higher returns on their investments. Similarly, when countries strengthen their currencies through trade surpluses or capital inflows, it can put downward pressure on bond yields as foreign investors seek better returns elsewhere.
The impact of higher interest rates is significant as it affects various sectors of
