Japan raises 10-year bond coupon rate to 3.1%, highest in 30 years

Japan has raised the coupon rate on 10-year government bonds issued this month to 3.1 percent per year, the highest level in roughly three decades. Rising market yields — driven by expectations of further Bank of Japan rate hikes and inflation concerns stemming from Middle East tensions — have pushed the interest burden on newly issued bonds to their highest point since the mid-1990s.

Japan's Ministry of Finance raised the coupon rate on 10-year government bonds issued this month to 3.1 percent from 2.7 percent, an increase of 0.4 percentage points, according to the Nikkei and other media outlets Tuesday.

The coupon rate on 10-year bonds has not exceeded 3 percent since 1996. At 3.1 percent, it matches the level recorded in August 1996 — the highest in about 30 years.

The coupon rate is the interest rate the government promises to pay investors periodically when it issues a bond. When yields on existing bonds trading in the market rise, newly issued bonds must offer a matching coupon rate to attract buyers.

The Finance Ministry's decision to raise the coupon rate sharply this time reflects the recent climb in bond market yields. The ministry reviews the coupon rate on newly issued bonds every three months, taking into account movements in market interest rates.

Japan's long-term interest rates have been rising steeply in recent months. Last month, the yield on 10-year government bonds — the benchmark for long-term rates — climbed above 3 percent, reaching its highest level since 1996.

Expectations of additional BOJ rate hikes have been pushing market yields higher, while rising energy prices and inflation concerns tied to instability in the Middle East have added to selling pressure on bonds. The view that the BOJ may maintain its monetary tightening stance if inflationary pressures persist is increasingly being priced into government bond yields.

Higher bond yields also translate into a heavier fiscal burden for the Japanese government. Japan carries government debt exceeding twice its GDP, meaning that as borrowing costs on new and refinanced bonds rise, so too does the interest the government must pay.