Japan must choose between cheap money and a livable yen

A woman walks past an electronic quotation board in Tokyo on Monday. The Bank of Japan must decide whether to counter yen‑driven inflation through higher rates or preserve ultralow borrowing costs despite the strain on households. | AFP-JIJI

Sep 15, 2026

Japan’s 10-year government bond yield has reached 3% for the first time since 1996. It remains below comparable U.S. and European yields, but the pace of increase is striking — roughly 2 percentage points in as many years.

A long-term yield can be decomposed into expected future short-term rates and a term premium. My calculations based on Bank of Japan estimates published in August 2026 attribute roughly half the increase to each component. Quantitative tightening — reduced BOJ purchases of Japanese government bonds since August 2024 — appears to explain only 30% of the term-premium increase. The remainder likely reflects the limited capacity of banks and insurers to absorb additional JGBs, as well as growing concerns about Japan’s fiscal outlook.

These developments cannot be separated from the yen’s depreciation. After the dollar approached ¥164 in late July, coordinated Japan-U.S. intervention briefly brought it into the ¥155 range. The effect faded, with the dollar returning to around ¥159 in late August. At Jackson Hole, Federal Reserve Chair Kevin Warsh prioritized price stability over maximum employment, noting that U.S. inflation had remained above the 2% target for too long. His hawkish message briefly pushed the dollar back above ¥160.

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