IIF Asia Economic Views: The Fiscal Channel in Japan's Long Yields

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Jonathan Fortun asks whether fiscal pressure is behind the rise in long Japanese yields and the weakness of the yen. The note finds that the 10 year JGB yield has risen by more than 100 basis points in 2026, even as its premium over swaps has narrowed. Forward rates five to ten years out sit well above the Bank of Japan's estimated neutral range, which points to a higher expected policy path, greater uncertainty, or both. The yen is also weak relative to the U.S. and Japanese yield gap, possibly reflecting fiscal expansion and outward investment by residents. Because average coupons trail current yields, interest costs should keep climbing as debt rolls over.