Six grounds are presented for why fiscal concerns alone cannot explain the rise in long-term interest rates above 3%. The analysis says that the Bank of Japan's monetary-policy normalization and global fund flows are also having an impact.
The article examines the factors behind rising long-term interest rates from six perspectives, arguing that fiscal concerns alone are insufficient to explain them. Strategic investment through public-private partnerships is gathering pace worldwide, and expanding demand for funds has been cited as a possible factor pushing long-term interest rates higher.
One factor cited is the interest paid on the Bank of Japan's excess reserves, which could affect financial institutions' investment in Japanese government bonds. The explanation is that higher interest payments would relatively weaken the incentive to buy government bonds, potentially putting upward pressure on long-term interest rates.
The Bank of Japan's simultaneous policy-rate increases and reduction of its government-bond purchases are also cited as factors. Reduced bond purchases affect long-term interest rates through supply and demand and coexist as a factor driving rates higher.
The overseas asset allocation of the Government Pension Investment Fund (GPIF) has also been cited as potentially affecting the supply of domestic long-term funds. Diversification into overseas assets aims to spread risk and secure returns, but if the supply of domestic funds falls short, supply and demand could tighten and long-term interest rates could rise.
Market pricing is also considered an important factor. An upward revision to interest-rate expectations, including a rise in the one-year rate two years ahead, indicates expectations of additional Bank of Japan rate hikes and is correlated with higher long-term interest rates.