Tokyo: Qatar National Bank (QNB) attributed the rise in long-term Japanese government bond yields to several factors, most notably a structural shift in nominal growth driven by changes in political leadership, in addition to declining institutional demand amid regulatory changes.
According to Qatar News Agency, in its weekly commentary, QNB stated that after decades of deflationary stagnation and exceptionally low interest rates, Japan has entered a new macroeconomic regime. Following the Covid-pandemic and the Russia-Ukraine war, the "supply shocks" of confinement measures and geopolitical disruptions, combined with the global surge in commodity prices, fuelled prices in Japan. These events were amplified by a large "demand shock" from significant fiscal support with ultra-loose monetary policy, pushing up the prices of goods.
After major central banks began to hike interest rates to control inflation, the interest rate gap with Japan widened, while the Bank of Japan (BoJ) maintained its "ultra loose" monetary policy with a negative short-term policy rate of -0.1 percent. As a result, the Japanese Yen (JPY) depreciated sharply, inducing renewed price pressures and pushing inflation above 4 percent in early 2023, a level not reached in over three decades.
To control inflation, the BoJ started a historic process of monetary policy normalization, ending negative rates for the first time in 17 years. Since 2024, the BoJ has increased the policy rate four times, totaling 85 basis points. Additionally, it has formally ended its Yield Curve Control (YCC) programme, removing the cap on the 10-year JGB (Japanese Government Bond) yield and shifting to a more flexible framework. With the end of YCC, the BoJ began scaling back its purchases of JGBs, from monthly bond purchases close to JPY 9 trillion at their peak in 2023, to around JPY 3 trillion, with further gradual reductions planned.
In this context, long-term JGB yields increased considerably from previous years. The benchmark 30-year JGB yield has risen by more than 2.5 percentage points to above 3.6 percent, the highest level in decades.
On the key drivers explaining the rise in long-term JGB yields, QNB explained that the rise reflects a structural shift in Japan's macroeconomic drivers, from an environment dominated by deflationary forces to a more "reflationary" period where growth and inflation are normalized. The initial external shocks from higher imported inflation rapidly affected domestic economic dynamics, contributing to breaking the long-standing deflationary trend. The annual "Shunto" wage negotiations, for example, have delivered wage increases of around 5 percent, the highest in several decades. In a context of acute labour shortages, these wage gains strengthened expectations that inflation has undergone a permanent upward level adjustment.
Higher inflation, alongside higher real GDP growth from strong exports and a corporate investment revival, helped boost nominal GDP growth. While annual nominal GDP growth averaged 0.1 percent between 2000 and 2020, this figure has accelerated to an average annual growth of 3.7 percent for the 2021-2025 period. As a result, investors have revised their assessment of equilibrium interest rates, pushing up longer-dated yields.
The emergence of Prime Minister Sanae Takaichi in October 2025 consolidated the perception that higher nominal growth is set to continue in Japan. Takaichi supports more aggressive fiscal policies aimed at securing stronger growth and industrial policy and for de-prioritizing debt reduction and central bank independence. Takaichi's victory strengthened expectations of more robust economic growth and higher inflation, especially if fiscal policy becomes more expansive. Long-dated bonds, particularly ultra-long ones of more than 30 years duration, are highly sensitive to nominal growth, and the assumption of near-zero nominal growth appears to have been broken.
Regulatory changes and balance sheet considerations have reduced private institutional domestic demand in the JGB market. Japanese regulation is transitioning from a solvency regime based on book-value to a market-based framework, penalizing interest-rate risk and duration mismatches. As a result, traditional domestic investors in JGB, particularly life insurers, have scaled back their demand. This has significantly impacted the JGB market, given that life insurers previously absorbed around 35 percent of net issuances for long JGB, reducing purchases by several trillion JPY per year. The weaker demand from life-insurers amid regulatory changes has contributed to the increase in long-term JGB yields.
QNB concluded that the increase in longer-term JGB yields results from a structural shift in nominal growth, amplified by country leadership changes and reduced institutional demand amid regulatory changes. This reflects Japan's transition towards a more conventional monetary and macroeconomic environment after decades of deflationary dynamics.