Long-term interest rates have entered an upswing, with the 10-year JGB yield expected to approach the 3% range. The analysis estimates the number of Bank of Japan rate hikes based on the potential growth rate, expected inflation rate and risk premiums.
Rising long-term interest rates will push up interest payments on long-term government bonds, adding to pressure on public finances. The analysis identifies four components of interest rates: the potential growth rate, expected inflation rate, credit risk premium and term risk premium.
The potential growth rate is estimated at approximately 0.6% by the Bank of Japan, while the Cabinet Office’s semiannual estimate is 0.4%. The expected inflation rate is currently estimated at approximately 2.0%. Their combined total of around 2.6% suggests an approximate neutral rate, implying a theoretical terminal rate of 2.50–2.75%.
The credit risk premium is estimated at approximately 0.3%, based on CDS premiums. Including the term risk premium, the theoretical 10-year JGB yield could be “2.9 + x%,” the analysis indicates.
On the fiscal side, higher spending under growth strategies, including effectively reducing taxes on food and beverages to zero, could push up the term risk premium. At the same time, if the assumptions underlying interest payments become reality, the fiscal buffer could shrink, creating a scenario in which interest rates continue to rise.