Japan is dragging the whole world down with it.

Japanese government bond yields have broken through 3% for the first time in 30 years. Nomura Research Institute warns that the source of this round of global long-term interest rate increases is Japan, not external factors. The combination of Japanese fiscal risks and expectations of monetary policy normalization is spreading globally through the bond market, posing a systemic threat to technology stocks, AI investments, and even the real economy.

The yield on 10-year Japanese government bonds (JGBs) briefly broke through 3.0% in Tokyo trading, the first time since September 1996. According to Wind Trading, Takahide Kiuchi, executive economist at Nomura Research Institute, pointed out in his latest report that the yield on 10-year JGBs has risen by about 1.4 percentage points over the past year, while the yield on 10-year US Treasury bonds has risen by only about half that of Japan. This indicates that the rise in JGB yields is mainly driven by domestic factors, rather than by transmission from overseas markets.

Takahide Kiuchi argues that, in terms of absolute yield levels, Japanese government bonds have reached a 30-year high, while US Treasury yields have only returned to their highest levels since January 2025. German 10-year bond yields are at their highest since 2011, and UK 10-year bond yields are at their highest since 2008. In comparison, Japan is more likely to be the source of the global rise in long-term interest rates than a passive follower. Meanwhile, the Trump administration has begun to intervene in Japanese economic policy in a rare move, pressuring the Bank of Japan to raise interest rates and the Kagoshima city government to tighten fiscal expansion.

Three factors have driven Japanese government bond yields above 3%.

According to a report by Nomura Research Institute, the yield on 10-year Japanese government bonds approached the 3% mark in August and finally broke through this level during trading on September 1, driven by three factors.

First, expectations of a Federal Reserve interest rate hike are rising. Remarks by Federal Reserve Chairman Kevin Warsh at the recent Jackson Hole symposium have strengthened market expectations for a rate hike at the Federal Open Market Committee (FOMC) meeting in September, putting pressure on global bond markets.

Secondly, expectations for a Bank of Japan interest rate hike are rising. The market widely anticipates that the Bank of Japan will raise its policy rate at its September monetary policy meeting, further pushing up Japanese government bond yields.

Third, the risk of fiscal expansion in Japan has intensified. As of the end of August, the total amount of general accounting budget requests submitted by various ministries and agencies in Japan for fiscal year 2027 was about 20 trillion yen higher than the budget for fiscal year 2026, significantly exacerbating market concerns about the deterioration of Japan's fiscal situation.

Fiscal risk is the main reason for rising yields.

Nomura Research Institute analyzed the reasons for the 1.4 percentage point rise in the 10-year Japanese government bond yield over the past year. The results showed that rising inflation expectations contributed about 0.49 percentage points, changes in the proportion of Japanese government bonds held by the Bank of Japan contributed about 0.08 percentage points, rising US 10-year Treasury yields contributed about 0.08 percentage points, changes in real policy interest rate expectations contributed about 0.15 percentage points, and "other" factors contributed as much as 0.60 percentage points—this item is considered to mainly reflect the risk premium of Japan's deteriorating fiscal situation.

This means that among all the factors driving up Japanese government bond yields, the fiscal risk premium is the single largest contributor, far exceeding the impact of inflation expectations and monetary policy expectations.

Takahide Kiuchi points out that rising long-term interest rates are not always a "bad thing"—if they stem from increased economic growth potential or rising inflation expectations, real interest rates may not necessarily rise accordingly, and the negative impact on the economy is limited. However, if the rise is mainly due to fiscal risks, it often has a substantial negative impact on economic activity, and this impact is usually more delayed and harder to detect than rising short-term interest rates.

The Trump administration's rare intervention in Japanese economic policy

The Trump administration has begun to intervene in Japanese economic policy in unusual ways. At the recent G20 finance ministers and central bank governors meeting, U.S. Treasury Secretary Bessenter made it clear to Japanese Finance Minister Satsuki Katayama and Bank of Japan Governor Kazuo Ueda that Japan needs to clearly communicate its fiscal sustainability path and interest rate hike plans.

Previously, after the joint US-Japan foreign exchange intervention ended at the end of July, Bessant had publicly expressed his expectation for a Bank of Japan interest rate hike. Nomura Research Institute believes that the logic behind the Trump administration's move is that the continued depreciation of the yen and the decline in Japanese bond prices (rising yields) could have a negative impact on the US and even global markets. Therefore, Washington is seeking to more proactively intervene in Japan's economic policy direction, pushing the Bank of Japan to raise interest rates and prompting the Takashi City government to tighten its fiscal expansion stance.

The report points out that if the Kaohsiung City Government gradually adjusts its proactive fiscal policy stance, the risk of Japan's fiscal deterioration will decrease, and the upward pressure on the 10-year Japanese government bond yield will also ease.

Rising Japanese bond yields could trigger global financial market turmoil and cool the AI craze.

Nomura Research Institute warns that the potential impact of rising global long-term interest rates, originating in Japan, on the economy and financial system should not be underestimated.

From a macroeconomic perspective, rising long-term interest rates will increase government interest expenditures, potentially triggering a negative spiral of "fiscal deterioration—rising yields," while simultaneously depressing the market value of bonds in financial institutions' portfolios and undermining their balance sheet stability. Furthermore, rising interest rates will also suppress the prices of risky assets such as real estate and stocks.

Of particular note are technology and AI-related stocks. These assets are especially sensitive to rising interest rates. Takahide Kiuchi points out in his report that if long-term interest rates, particularly in Japan, continue to rise, it could trigger a cooling of the AI boom in the stock market. A decline in AI-related stock prices would further weaken the ability of these companies to raise large-scale investment funds through equity or debt financing, thus putting a brake on the expansion of physical asset investment in AI infrastructure.

"This could be more than just a gradual cooling of global economic activity; it could potentially trigger a sudden economic slowdown," the report stated. Nomura Research Institute believes this partly explains why the Trump administration chose to take the rare step of direct intervention, urging Japan to move away from a policy path that could further depress the yen and push up long-term yields.

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