Looking through the volatility: Where are medium- and long-term rates headed in Japan?

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Where are medium- and long-term rates headed in Japan?

Japan Macro Commentary - April 2026
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Yen movements and long-term rates: The calm before the storm?

Japan Market Insights - March 2026
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Looking through the volatility: Where are medium- and long-term rates headed in Japan?

Sumitomo Mitsui DS Asset Management

Published

20/04/2026

Read time 10 minutes

Capital at risk. All investments involve risk and investors may not get back the amount originally invested.

Highlights:

The pre-existing debate over how Prime Minister Takaichi’s fiscal agenda would interact with Japan’s substantial national debt has taken on a new urgency over the past month. With large-scale and potentially long-term disruption to energy supplies now expected due to the crisis in the Middle East, Japan’s situation as a heavy net oil and gas importer has cast a shadow over the market.
In this rapidly evolving situation, we have modelled our expectations for Japan’s long-term interest rates as benchmarked by the 10-year government bond (JGB) yield. We expect this rate to continue to rise gradually, reaching 2.80% by the end of fiscal 2031.
This is mainly due to a phenomenon we identify as a type of “diminishing stock effect” triggered by higher inflation in the medium to long term, which means the existing stock of JGBs falls in relative value.
If a surge in interest payments triggered by the rise in long-term rates and fiscal sustainability is further put into question, there is a risk that this will in turn set off further increases in the rates.
Whilst the risk of a negative debt spiral is considerable, considering the composition of outstanding government bonds by remaining maturity, it is probable that the feed-through from higher yields to higher rates across the board will only take place incrementally, making it unlikely that such risks will surge or become systemic immediately.

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An investment’s value and the income deriving from it may fall, as well as rise, due to market and currency fluctuations. Investors may not get back the amount originally invested.

The information on this website is not intended to be investment advice, tax, financial or any other type of advice, and is for general information purposes only without regard to any particular user's investment objectives or financial situation. The information is educational only and should not be construed as an offer, solicitation, or recommendation to buy, sell, or transact in any security including, but not limited to, shares in any fund, or pursue any particular investment strategy. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, and are based on certain assumptions and current market conditions that are subject to change without prior notice. The views of Sumitomo Mitsui DS Asset Management (UK) Limited reflected may change without notice. In addition, Sumitomo Mitsui DS Asset Management (UK) Limited may issue information or other reports that are inconsistent with, and reach different conclusions from, the information presented in this report and is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report.

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