The Japanese government on Thursday more than doubled the coupon rate for new 10-year government bonds to 0.5 percent, the highest in more than eight years, reflecting a rise in long-term interest rates following the Bank of Japan's monetary policy tweak.
The Finance Ministry hiked the coupon rate -- the interest rate stated on bonds at their issuance -- for benchmark bonds issued in January from 0.2 percent to the highest level since December 2014, marking the first increase since April last year.
The yields on Japan's benchmark 10-year government bonds have risen to around 0.3 to 0.4 percent recently in the bond market after the BOJ decided in December to widen the trading band for the yields, in a surprise move that the market interpreted as an effective rate hike.
Although higher coupon rates on the key index are likely to benefit investors trading government bonds, it raises the risk of increasing debt-servicing costs for heavily indebted Japan, straining the country's finances.
In the auction held Thursday, the new No. 369 issue of long-term government bonds drew 10.45 trillion yen ($79 billion) in bids, of which the ministry accepted 2.19 trillion yen. The yield at the average price was 0.500 percent, up from 0.250 percent in December.
The increase in the coupon rate was the first since April 2022, when the ministry raised it for the sovereign bonds to 0.2 percent from 0.1 percent, as yields climbed in Japan after the U.S. Federal Reserve started rate hikes to contain inflation.
The coupon rate for 10-year Japanese government bonds hit 7.9 percent in 1990 when the Japanese economy was experiencing an asset-inflated bubble, but it declined in tandem with a downturn in the Japanese economy.
The rate dropped further as BOJ Governor Haruhiko Kuroda launched its large-scale monetary easing in 2013. After the bank in 2016 introduced a negative interest rate of 0.1 percent on some reserves it holds for commercial banks, the coupon rate had been kept at 0.1 percent.
In the draft budget for fiscal 2023, Japan earmarked 25.25 trillion yen as debt-servicing costs, including 8.47 trillion yen in interest payments, assuming that the yields on long-term government bonds trade at 1.1 percent.