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“Good Interest Rate Rise” “Badass Interest Rate Rise”

Interest rates serve as a barometer of the economic condition. When market interest rates rise, they can be classified into “good interest rate rise” and “badass interest rate rise” depending on the factors involved.

For example, if the economy improves, the demand for funds increases and the market interest rate rises. Additionally, if the economy overheats, inflation concerns arise, prompting the central bank to shift to a tightening mode of monetary policy, aiming for sustainable growth and inflation control.

In this way, the rise in interest rates due to the expansion of the economy can be referred to as a “good rise in interest rates.”

On the other hand, interest rates may also reflect credit risk.

For example, corporate bonds issued by companies with lower creditworthiness have higher interest rates because the credit risk is added to the interest rate, resulting in a higher rate even for the same term. Government bonds are considered to have the highest creditworthiness among bonds, but if the credit risk of the country increases, interest rates will rise, particularly in the long term. Additionally, if the inflation rate rises and future inflation becomes a concern, interest rates will rise similarly to credit risk.

The expansion of credit risks and the rise in interest rates due to inflation concerns can be referred to as a “badass interest rate rise.”

Attention is focused on the Interest Rate of government bonds

In a normal market, the volatility (fluctuation rate) is high for stocks and foreign exchange. Compared to these, the movement of the Intrerest Rate has a lower fluctuation rate and was a rather subdued presence in the market.

However, attention is being drawn to the interest rates of government bonds in various countries around the world. The reason is that credit risk and inflation have emerged as themes in the market.

The rise in long-term Interest Rate is the “canary in the coal mine” for fiscal issues.

The movement of long-term government bond interest rates is sometimes referred to as a “canary in the coal mine” that indicates concerns about a country’s fiscal issues. The term “canary in the coal mine” originates from the practice of using canaries in coal mines to check whether the environment was safe from oxygen deprivation.

The rise in long-term interest rates may indicate that the market is starting to sound the alarm about the deterioration of the country’s financial situation.

Concerns Over Japan’s Rising Fiscal Deficit Due to Tax Cuts

In Japan, it has become a topic of discussion that the interest rates on ultra-long-term government bonds, such as 30-year and 40-year bonds issued by the government, have surged recently. The institutions investing in these long-term government bonds are primarily institutional investors that gather long-term operating funds, such as insurance companies. Concerns about future fiscal deterioration have led to a decrease in buyers as they hold back on purchases, resulting in rising interest rates (and falling prices). Recently, it has been observed that the interest rate increases for longer-term government bonds are larger compared to relatively shorter-term government bonds of up to 10 years, leading to a steeper yield curve.

According to the Ministry of Finance, the “national debt,” which totals government bonds, borrowings, and short-term government securities, will amount to 1,323 trillion 715.5 billion yen by the end of the fiscal year 2024, an increase of 26 trillion 554 billion yen from the previous year, marking the highest level for nine consecutive years. With the House of Councillors election approaching, discussions on reducing the consumption tax are taking place in the National Diet. The government has stated that it does not plan to introduce this due to a lack of funding, but the situation remains uncertain depending on the election results.

The rise in long-term Intrerest Rate reflects the risk of further deterioration in this fiscal condition.

Concerns about fiscal deficits also affect monetary policy.

If interest rates start to rise due to concerns about the budget deficit, the cost of raising new government bonds issued by the government will also rise. If this happens, we will fall into a spiral situation in which the fiscal deficit will expand further. If long-term interest rates rise, the interest rate on government bonds issued in the future will also rise, further straining the government’s fiscal situation.

Former BOJ Governor Kuroda has implemented a zero interest rate policy to lower the policy interest rate and has advanced yield curve control (YCC) to suppress long-term interest rates through the purchase of government bonds. Current BOJ Governor Ueda is attempting to raise the policy interest rate and stop the yield curve control, but the expansion of the fiscal deficit may pose an obstacle to this.

The “Dollar Decoupling” Progressing Due to Trump Tariffs

The United States is facing similar fiscal deficit issues as Japan.

The Trump administration passed a large bill in Congress that includes an extension of tax cuts. Estimates suggest this could lead to a significant fiscal deterioration of $3 trillion to $5 trillion over the next 10 years. Similar to Japan, the increase in government bond supply will put upward pressure on interest rates.

Furthermore, if the uncertainty surrounding Trump’s tariffs leads to a reevaluation of the currency distribution centered around the US dollar, it will lose its strength as a reserve currency. Along with this, there are concerns that the status of US Treasuries as a safe asset may also be jeopardized.

The world’s “dollar de-dollarization” is a significant risk for US Treasuries.

The “badass Intrerest Rate rise” progresses in Europe

The uncertainty in the global economy due to Trump’s tariffs is also affecting Europe.

Economic activity may stagnate due to production adjustments and the relocation of production bases caused by opaque tariff policies, leading to supply shortages. Additionally, the increase in costs due to tariffs may also become a factor in pushing up prices.

The U.S. military strategy is also undergoing significant changes, leading to an increase in the defense spending burdens of European countries. The increase in defense spending is a factor contributing to the deterioration of fiscal conditions.

Interest Rate Moves Exchange Rates and Stock Prices

In this way, it seems that in the future market, exchange rates and stock prices will increasingly be influenced by global Intrerest Rates. The Intrerest Rate, which has been a supporting role in the market until now, will take center stage, raising concerns about “badass rise”. Let’s pay more attention than ever to the movements of policy Intrerest Rates and long-term Intrerest Rates in various countries.