JPY Forecast: Japan Raises Debt Cost Assumption to 30-Year High

The Japanese Yen faces renewed structural headwinds as the Ministry of Finance (MOF) prepares to raise its assumed interest rate for government borrowing to 3.0% for the 2026 fiscal year—the highest level since 1997.

Fiscal Reality Check

This adjustment, up from 2.6% in August and just 2.0% in the current fiscal year, acknowledges the new reality of rising Japanese Government Bond (JGB) yields. The 10-year JGB yield recently touched 2.1%, a level unseen since 1999, driven by:

• BOJ Normalization: The Bank of Japan recently hiked rates to 0.75%.
• Expansionary Spending: Prime Minister Takaichi's administration is pushing a record 122 trillion yen budget, necessitating massive new bond issuance.

Market Implications

The convergence of rising debt service costs (projected to hit 31.3 trillion yen) and aggressive fiscal spending creates a precarious scenario for the Yen.

• Bearish Case: If the BOJ cannot hike rates fast enough to offset the inflationary impact of fiscal expansion, real yields may remain negative, punishing the JPY.
• Bullish Case: If rising servicing costs force fiscal discipline or faster BOJ hikes, the JPY could stabilize.

Currently, the market views the debt sustainability issue as a long-term drag on the currency, leaving USD/JPY sensitive to any widening in the US-Japan rate differential.