Following an IMF warning at Jackson Hole in the western United States, Japan’s long-term interest rates rose to 3%. This article explains the risks of fiscal dominance and the outlook for the Bank of Japan’s policy management.
At an IMF meeting held in Jackson Hole at the end of August 2026, concerns were raised about fiscal dominance, once again drawing attention to the relationship between fiscal policy and monetary policy in countries around the world. Fiscal dominance refers to a situation in which monetary policy is constrained by the government’s fiscal position, and views emerged that the risk could also spread to Japan.
On 1 September, the yield on newly issued 10-year Japanese government bonds, the benchmark for long-term interest rates in Japan’s government bond market, briefly reached 3%. Yields in the 3% range had not been seen for approximately 30 years, and concerns over fiscal conditions intensified as interest rates rose.
Japan’s government debt is approximately twice its GDP, the highest level among OECD member countries. In addition, the Bank of Japan holds approximately half of all outstanding government bonds, meaning that rising interest rates could simultaneously increase the government’s interest burden and make policy management more difficult.
Higher interest rates would increase the government’s interest payments and affect financial institutions holding government bonds. To avoid instability in the government bond market, the Bank of Japan could be forced to choose whether to continue purchasing government bonds, raising the question of whether priority should be given to price stability or fiscal management.
Fiscal dominance refers to a situation in which monetary policy overall is constrained by fiscal considerations, while fiscal financing means measures through which the Bank of Japan directly supports the government’s funding. This article explains the concept of fiscal dominance and its relationship with the Bank of Japan’s independence and policy choices.