Japan is entering a new era of rising interest rates, as Prime Minister Shigeru Ishiba has pointed out. The nation has had low rates for a long time, so many people are not used to seeing rates go up. Ishiba noted that higher rates will raise the government’s costs for borrowing, which could affect public spending. He emphasized the need to maintain trust in Japan’s financial stability from both the public and the markets. The Bank of Japan is struggling to raise rates, with market expectations only about 18 basis points for the end of the year. Many believe there won’t be any rate hikes until at least summer. As Japan moves away from its long period of very low interest rates, there is a noticeable change in government messaging. Ishiba’s comments show that the government is getting people ready for the impacts of higher borrowing costs, both for individuals and the country. We see early signs of this in bond pricing, where expectations are low. Markets are cautious, predicting less than 20 basis points of increases by December. This small increase over a year shows doubts about the Bank’s ability to act decisively in the near future. The Bank of Japan now faces a complicated situation. As rates rise, the already high costs of debt will increase even more. Ishiba’s comments reflect concerns about the need for tighter financial measures. Higher costs will either call for more revenue or less spending, or possibly both. This is not good news for government programs that are already stretched thin. Last week, trading activity showed little change, indicating that market participants do not expect a shift towards a more aggressive policy right away. This could suggest a calm market that is too relaxed. However, if the gap between the Bank’s messages and future rates continues, any significant changes could be sharp and risky. Traders should focus on short Japan Government Bond (JGB) futures and notice shifts in long-term swap curves. If there is any movement before summer, it might start with these instruments. Watch for how well fiscal leaders and BoJ officials communicate in the coming weeks. History tells us that when the government and the central bank seem out of sync, it often leads to market volatility. The pace of change may matter less than how it is communicated. If terms like “normalisation” start appearing often in official statements, it could signal a larger shift. This kind of language often comes before significant changes in pricing. Currently, stress indicators seem calm, almost sleepy. However, with options on short-term exposures still relatively cheap, there is growing interest in taking positions that expect a steeper path for rates than what is currently indicated. Markets tend to rely on recent history, and the memory of zero or negative rates is still strong. We understand the current outlook—but we also know how quickly things can change due to unexpected policy decisions or external data. While timing remains uncertain, major shifts like these rarely happen in perfectly orderly steps.

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