Japan can sustain a 10-year JGB yield above 3%

The rise in the 10-year JGB yield to more than 3% this week is concerning as that benchmark is now higher than our long run forecast for Japan’s nominal GDP growth. However, for now we aren’t overly worried about Japan’s public debt sustainability as higher funding costs will take many years to feed through into the stock of outstanding debt. What’s more, higher bond yields also lift the returns on the government’s large holdings of interest-bearing assets.