Japan's benchmark government bond yield has broken above 3% for the first time in three decades, and according to Nomura Research Institute, it is Japan—not external forces—that is the epicenter of this global surge in long-term interest rates. The combination of fiscal risks and expectations for monetary policy normalization is now rippling through global bond markets, posing a systemic threat to technology stocks, AI investment, and the broader real economy.

The 10-year Japanese Government Bond (JGB) yield briefly touched 3.0% during Tokyo trading hours, a level not seen since September 1996. In a recent report, Nomura Research Institute Executive Economist Takahide Kiuchi noted that the 10-year JGB yield has climbed roughly 1.4 percentage points over the past year, while the comparable rise in the US 10-year Treasury yield was only about half that amount. This suggests the JGB move is predominantly driven by domestic factors rather than imported from overseas markets.

Kiuchi argues that in absolute terms, JGB yields have reached a 30-year high, while US Treasuries have only returned to levels last seen in January 2025. German 10-year bunds are at their highest since 2011, and UK 10-year gilts are at their highest since 2008. Taken together, Japan is more likely the origin of the global rise in long-end rates than a passive follower. Meanwhile, the Trump administration has begun unusually intervening in Japan's economic policy, pressuring the Bank of Japan (BOJ) to hike rates and urging the Tokyo metropolitan government to scale back fiscal expansion.

Three Forces Push JGB Yields Through the 3% Mark

According to the Nomura Research Institute report, the 10-year JGB yield approached the 3% threshold in August and finally broke through the round number on September 1 during intraday trading, driven by three key factors.

First, expectations of US Federal Reserve rate hikes have intensified. Fed Chair Kevin Warsh's remarks at the recent Jackson Hole symposium strengthened market expectations for a rate hike at the September Federal Open Market Committee (FOMC) meeting, putting pressure on global bond markets.

Second, expectations of BOJ rate hikes are building. Markets broadly anticipate that the Bank of Japan will raise its policy rate at the September monetary policy meeting, further pushing JGB yields higher.

Third, Japan's fiscal expansion risks are escalating. As of the end of August, the total general-account budget requests submitted by Japanese ministries for fiscal 2027 were roughly 20 trillion yen higher than the fiscal 2026 budget, sharply intensifying market concerns over the deterioration of Japan's fiscal position.

Fiscal Risk Is the Primary Driver of Yield Increases

Nomura Research Institute decomposed the 1.4 percentage point rise in the 10-year JGB yield over the past year. The analysis shows that rising inflation expectations contributed approximately 0.49 percentage points, changes in the BOJ's JGB holdings ratio contributed about 0.08 percentage points, the rise in US 10-year Treasury yields contributed roughly 0.08 percentage points, and changes in real policy rate expectations contributed approximately 0.15 percentage points. However, the "other" factor accounted for as much as 0.60 percentage points—an element believed to primarily reflect the risk premium associated with Japan's worsening fiscal outlook.

This means that among all the factors pushing JGB yields higher, the fiscal risk premium is the single largest contributor, far exceeding the impact of inflation expectations or monetary policy expectations.

Kiuchi points out that rising long-end rates are not always "bad"—if they stem from improved growth potential or higher inflation expectations, real rates may not necessarily follow suit, and the negative impact on the economy is limited. However, if the rise is primarily driven by fiscal risk, it tends to have a material negative effect on economic activity, and such shocks are typically more delayed and harder to detect than moves at the short end of the curve.

Trump Administration Takes Unprecedented Step into Japan's Economic Policy

The Trump administration has begun intervening in Japan's economic policy in unusual ways. At the recent G20 Finance Ministers and Central Bank Governors meeting, US Treasury Secretary Bessent explicitly told Japanese Finance Minister Katayama Satsuki and BOJ Governor Ueda Kazuo that Japan needs to clearly communicate its fiscal sustainability path and its rate hike plans.

Earlier, in late July, after the joint US-Japan foreign exchange intervention concluded, Bessent had already publicly expressed expectations for BOJ rate hikes. Nomura Research Institute believes the logic behind the Trump administration's move is that sustained yen depreciation and falling JGB prices (rising yields) could have negative spillover effects on the US and global markets. As a result, Washington is seeking more proactive involvement in shaping Japan's economic policy direction, pushing the BOJ to hike rates and urging the Tokyo metropolitan government to moderate its fiscal expansion stance.

The report notes that if the Tokyo metropolitan government gradually adjusts its aggressive fiscal policy stance, the risk of Japan's fiscal deterioration will decline, and upward pressure on the 10-year JGB yield will ease accordingly.

Rising JGB Yields Could Trigger Global Financial Turmoil and Cool the AI Boom

Nomura Research Institute warns that the global rise in long-end rates, with Japan as the epicenter, carries potential shocks to the economy and financial system that should not be underestimated.

At the macroeconomic level, rising long-end rates will increase government interest payments across countries, potentially triggering a negative spiral of "fiscal deterioration—higher yields," while simultaneously depressing the market value of bonds held in financial institutions' portfolios, undermining their balance sheet stability. Additionally, higher rates will weigh on risk asset prices such as real estate and equities.

Tech and AI-related stocks deserve particular attention. These assets are especially sensitive to rising rates. Kiuchi notes in his report that if the Japan-centered rise in long-end rates persists, it could trigger a cooling of the AI boom in equity markets. A decline in AI-related stock prices would further weaken the ability of these companies to raise large-scale investment capital through equity or debt financing, thereby putting the brakes on the expansion of physical investment in AI infrastructure.

"This may not just be a gradual slowdown in global economic activity, but could trigger an abrupt economic deceleration," the report states. Nomura Research Institute believes this partly explains why the Trump administration has chosen to take rare direct intervention action, urging Japan to steer away from policy paths that could further weaken the yen and push long-end rates even higher.