The JGB market in July 2026 saw a bear shift across all maturities, with the center of the increase moving to the 40-year zone. According to data published by the MOF, the 40-year JGB posted the largest increase across all maturities, rising +0.175pt from the previous month-end, while the curve’s hump centered on the 25-year maturity narrowed to 0.020pt. The real 10-year yield, calculated by subtracting the June CPI year-on-year increase of 1.7% from the nominal 10-year yield of 2.801%, stood at 1.101% (preliminary), remaining in positive territory. The biggest change this month is that the r side of debt dynamics is steadily shifting upward ahead of the fiscal-consolidation milestone of achieving a primary balance (PB) surplus.
Yield Curve Dynamics — Bear Shift Led by the 40-Year Zone
The curve’s July move was characterized by a notably larger increase at the ultra-long end amid rising yields across all maturities.
| Maturity | Month-end (%) | Change from previous month (pt) | Change from 6M prior (pt) |
|---|---|---|---|
| 1Y | 1.255 | +0.090 | +0.259 |
| 2Y | 1.507 | +0.125 | +0.256 |
| 5Y | 2.044 | +0.107 | +0.378 |
| 10Y | 2.801 | +0.111 | +0.554 |
| 20Y | 3.690 | +0.065 | +0.504 |
| 30Y | 3.982 | +0.109 | +0.405 |
| 40Y | 3.967 | +0.175 | +0.286 |
Changes from the previous month ranged from +0.065pt to +0.127pt for maturities from 1Y through 30Y, representing an almost parallel shift. Against this backdrop, only the 40-year JGB stood out, rising +0.175pt.
The curve remains upward-sloping from 1Y through 25Y (3.987%), while a slight inversion remains beyond 25Y, with 25Y>30Y>40Y. This ultra-long-end hump stood at 0.091pt between 25Y and 40Y at the previous month-end, but narrowed to 0.020pt at the end of July. There are two interpretations. One is that the ultra-long fiscal risk premium has begun to re-emerge in the 40-year zone. The other is that the move represents an arbitrage-driven correction in the level of 40-year JGBs, which had been relatively undervalued against 25-year bonds. Compared with six months earlier, the increase in 40-year yields (+0.286pt) was smaller than that in 10-year yields (+0.554pt), indicating that the initial point of the rise was the medium- to long-term zone rather than the ultra-long end. This fact supports interpreting the July move in 40-year JGBs as a catch-up by a lagging maturity rather than conclusively as a pure expression of fiscal distrust.
Another change was an acceleration during the month. The month-end 2-year yield of 1.507% was 0.056pt above the July monthly average of 1.451%. This indicates that pricing in the short-term zone intensified in the latter half of July.
Term Spread Analysis — 10Y-2Y Caps Out, 30Y-10Y Continues to Narrow
The monthly average spreads entered a pause in their widening trend in July. The 10Y-2Y spread was 1.294%, narrowing by 0.014pt from the previous month’s 1.308%, while the 30Y-10Y spread narrowed by 0.002pt to 1.181%. By contrast, the 40Y-10Y spread widened by 0.064pt, from 1.102% to 1.166%.
The pattern across the first half of 2026 is clear. The 10Y-2Y spread widened by 0.298pt, from 0.996% in January to 1.294% in July, while the 30Y-10Y spread narrowed by 0.149pt, from 1.330% to 1.181%. In other words, steepening progressed in the medium- to long-term zone, while the ultra-long zone flattened relatively. This is consistent not with a “fiscal-confidence shock” in which rates jump led by the ultra-long end, but with a “normalization” pattern in which upward revisions to the policy-rate path and inflation expectations push up the 10-year zone.
However, it is not appropriate to interpret the narrowing of 30Y-10Y as a contraction in the fiscal premium. The absolute level of the 30-year yield remained high at 3.982% at month-end, and the primary reason for the narrowing was the 10-year yield catching up. Together with the reversal and widening of 40Y-10Y in July, this indicates that the ultra-long fiscal premium has not disappeared; it has temporarily been obscured by the rise in the 10-year zone.
Real Yield Analysis — Real Borrowing Costs in Positive Territory
The real 10-year yield rose 0.354pt over six months, from 0.747% in January to 1.101% in July (preliminary). Decomposed, the increase in the nominal 10-year yield contributed +0.554pt, while the rise in the CPI year-on-year rate from 1.5% to 1.7% contributed -0.2pt in the opposite direction. As nominal yields rose faster than inflation accelerated, real yields remained around positive 1%. However, the July figure is preliminary because July CPI had not yet been released and the June CPI year-on-year rate was used as a substitute. It therefore combines a month-end July nominal yield with a June price reading. This alone is insufficient to conclude that financial repression has ended; confirmation is required after the release of July CPI.
The implications fall into three areas. For the government, the erosion of the real value of debt due to inflation is diminishing, while the real funding cost of new issuance and refinancing has entered positive territory. For households, an environment continues in which long-term investments generate positive real returns. For companies, rising real borrowing costs raise the hurdle rate for capital investment decisions.
The composition of CPI warrants attention. According to data from the Statistics Bureau of MIC, core-core CPI fell from 2.6% year on year in January to 1.7% in June, while headline CPI rose from 1.5% to 1.7%. The underlying inflationary pressure is weakening, while the increase in headline CPI depends on volatile components. If headline CPI were to converge downward toward the core-core level, real yields would mechanically rise further even if nominal yields remained unchanged. This is the channel most easily overlooked from the perspective of fiscal costs.
Connection with BOJ Policy — The Policy Path Priced into the Short-Term Zone
Because call-rate data could not be obtained this time, the policy-rate level is assessed by backing it out from short-term-zone yields. The 1-year yield was 1.255% at month-end, up +0.090pt from the previous month and +0.259pt from six months earlier. The 2Y-1Y spread was 0.252pt, indicating that the market is pricing in additional policy-rate hikes over the next one to two years. The fact that the month-end 2-year yield of 1.507% exceeded the July average confirms that this pricing strengthened during the month.
The elevated level of the ultra-long zone cannot be separated from supply-and-demand factors amid the BOJ’s ongoing reduction in JGB purchases, or quantitative tightening (QT). As the reduction in purchases proceeds, the price formation of ultra-long JGBs will depend increasingly on demand from domestic institutional investors. The renewed widening of the 40Y-10Y spread is one example of price volatility arising during this transition. From a fiscal-cost perspective, higher policy rates affect the cost of short-term government securities and refinancing bonds immediately, while rising yields beyond 10 years gradually pass through to the average coupon rate of the debt stock each time bonds are issued. The increase in interest expenses emerges as a lagging phenomenon over several years.
Consistency with the Real Economy — Coincident Index Rises, Leading Index Flat
The Cabinet Office’s Composite Index of Business Conditions partially supports the view that rising rates are “good rate increases” accompanied by economic expansion. The June 2026 coincident index rose to 118.2 from 117.9 the previous month, while the lagging index improved from 111.4 to 112.3. The direction of improvement in the real economy is consistent with the rise in long-term yields.
However, the leading index stood at 116.4, remaining flat for the second consecutive month. Compared with the pace of increase from 112.5 in January to 116.4 in May, this represents a clear slowdown. The leveling off of the leading index may include the demand-suppressing effect of rising rates themselves. In debt dynamics, this is a factor weighing on g, nominal growth; if g slows while r rises, the r-g differential worsens from both sides. Whether the leading index can break out of its flat trend and reach the 117 range will be a focus going forward.
Corporate Sentiment — A Widening Gap Between Current Improvement and Deteriorating Outlook
The BOJ Tankan for Q2 2026 showed simultaneous improvement in current conditions and deterioration in forward-looking expectations.
- The business conditions DI for large manufacturers improved by 5 points to 22 from 17 in Q1
- Large non-manufacturers rose to 37 (36 in Q1), while small and medium-sized manufacturers rose to 9 (7 previously), indicating improvement across all company sizes
- By contrast, the forward-looking DI for large manufacturers was 14, implying an 8-point decline from the current reading of 22
- The assumed exchange rate for all companies and industries was revised toward a weaker yen at 152.57 yen, from 150.10 yen in Q1
The improvement in current business conditions provides a foundation for corporate income and is positive for tax revenues. However, actual tax revenue data were not obtained this time, so changes in tax buoyancy cannot be examined. More important is the gap in the forward-looking DI. The expected 8-point decline indicates that companies are cautious about the future demand environment. This signal points in the same direction as the flat leading index of the Composite Index of Business Conditions and reinforces the risk of slower nominal growth. The revision of the assumed exchange rate toward a weaker yen supports yen-denominated earnings for exporters, but it also has the potential to push up headline CPI through the import-cost channel.
Implications for the Current Account — Trade Balance Turns Positive, but Data Lag Matters
According to MOF trade statistics, the trade balance recorded a surplus of +306.0 billion yen in November 2025 and +94.8 billion yen in December, marking two consecutive months of surpluses after consecutive deficits from August through October. However, the available data run only through December 2025, leaving a substantial lag from the month under analysis. This limitation should be noted when using the data to assess the current external balance.
With this limitation in mind, Japan’s distinctive fiscal-sustainability conditions can be reviewed. Despite the high level of outstanding debt, the structural factors that have allowed the market to remain stable include an 88% domestic investor ownership share, debt denominated in the domestic currency, and the backing of domestic savings through a current-account surplus. The shift of the trade balance into surplus works to reinforce this third condition. Conversely, as QT proceeds and central-bank holdings decline, the effectiveness of this condition will depend on how far domestic institutional-investor demand can support the pricing of ultra-long bonds. Movements in the 40Y-10Y spread are the most direct indicator of changes in this supply-and-demand structure.
Outlook — The Tug-of-War Between a Primary Balance Surplus and the r-g Differential
If a primary balance surplus is achieved, pb(t) in the debt-dynamics equation will turn positive. If r-g remains unchanged, the debt ratio will move toward improvement. However, this month’s data show that the r side is shifting upward.
The yields applied to new issuance are 2.801% for 10-year bonds and 3.982% for 30-year bonds. Nominal growth is the sum of the CPI year-on-year rate of 1.7% and real growth, but real growth is not included in the current dataset. Accordingly, the sign of the r-g differential cannot be established numerically. What can be confirmed is that funding costs in the long- and ultra-long-term zones are near 4% and will push up the effective interest rate on the debt stock each time refinancing occurs. If the PB surplus remains below interest expenses, the fiscal deficit will continue and the absolute amount of outstanding debt will keep increasing.
The following four points should be monitored specifically as indicators for future assessment.
- The trajectory of the 40Y-10Y spread (1.166% in July): Continued widening would indicate a renewed ultra-long fiscal premium, while a return to narrowing would suggest that July’s move was a level correction
- The direction of convergence between headline CPI and core-core CPI: If headline CPI falls from 1.7% toward the core-core level, real yields will rise further
- Whether the CI leading index at 116.4 breaks out of its flat trend: This will help determine whether the slowdown on the g side is temporary or persistent
- The extent to which the Tankan forward-looking DI of 14 is realized: If Q3 results exceed expectations, the foundation for corporate tax revenues will be maintained
The July environment is one in which fiscal progress, namely improvement in the PB, and headwinds from rates, including a rise in r and real yields remaining in positive territory, are occurring simultaneously. Which factor prevails will depend on how far nominal growth can keep pace with rising funding costs.
Glossary
| Term | Definition |
|---|---|
| Bear Shift | A parallel upward shift in the entire yield curve, meaning higher yields and lower bond prices. The term is used when increases are roughly equal across maturities; when the curve’s shape also changes, the move is distinguished as bear steepening, led by longer maturities, or bear flattening, led by shorter maturities. |
| Term Spread | The yield difference between different maturities. The 10Y-2Y spread primarily reflects the economic cycle and expectations for the policy-rate path, while 30Y-10Y and 40Y-10Y are generally viewed as reflecting ultra-long fiscal confidence and inflation risk premia. |
| Curve Hump | A yield-curve shape in which a particular maturity is higher than the maturities on either side, creating a hump. At the end of July 2026, the 25-year JGB had the highest yield, with the 30-year and 40-year yields slightly lower. This often indicates a concentration of supply-and-demand pressures at a particular maturity. |
| Real Yield | The interest rate calculated by subtracting the inflation rate from the nominal yield. In this column, it is calculated as the nominal 10-year JGB yield minus the CPI year-on-year rate. A negative real yield indicates financial repression, in which the government’s real debt burden is eroded; a positive real yield indicates a real borrowing cost. |
| Financial Repression | A condition in which real interest rates are kept negative, reducing the real value of government debt at the expense of savers. It moves toward resolution as nominal rates rise or inflation declines. |
| r-g Differential | The difference between the effective interest rate (r) and nominal GDP growth (g). It is the most important driver of debt-to-GDP dynamics. If r<g, the debt ratio declines autonomously; if r>g, it rises. |
| Primary Balance (PB) | The primary fiscal balance: the difference between expenditure excluding interest payments and revenue excluding JGB issuance proceeds. Even if the PB is in surplus, the fiscal deficit and outstanding debt will continue to increase if the surplus is smaller than interest expenses. |
| QT (Quantitative Tightening) | A policy under which a central bank reduces its purchases of JGBs and shrinks its holdings. JGB price formation becomes more dependent on private-investor demand, making supply and demand in the ultra-long zone particularly prone to fluctuations. |
| Core-Core CPI | The Consumer Price Index excluding fresh food and energy. By excluding highly volatile components, it is used as an indicator of underlying inflationary pressure. |
| Business Conditions DI | In the BOJ Tankan, an index calculated by subtracting the percentage of companies reporting that business conditions are “bad” from the percentage reporting that they are “good.” A positive figure means that more companies judge conditions to be good. The forward-looking DI reflects the same companies’ expectations for several months ahead. |
| Gross Financing Needs | The sum of new financing required for the fiscal deficit and the refinancing amount of maturing bonds. It measures the scale of rollover risk; when interest rates rise, the effective interest rate increases each time debt is refinanced. |
This column was automatically generated by AI integrating Ministry of Finance JGB interest rate data (and tax revenue data when available), Bank of Japan statistics, and e-Stat public statistics as a fiscal analysis resource. This is not a recommendation to buy or sell any financial instruments or government bonds. Please make investment decisions at your own responsibility and consult professionals as needed.