Simulation of Interest Rates on Japanese Government Debt and the Domar Condition

This report simulates the rise in JGB coupon rates through FY2030, concluding that the 'Domar condition' remains satisfied under most growth scenarios but faces risks if nominal GDP growth returns to historical lows.

Key Takeaways

• 1.The weighted average coupon rate on outstanding JGBs is projected to rise from 0.98% at end-FY2025 to between 1.5% and 1.9% by end-FY2030 across three interest-rate scenarios.
• 2.The 'Domar condition' (nominal GDP growth > interest rate) is expected to hold through FY2030 if Japan maintains recent nominal growth levels (mid-2% to high-4%).
• 3.A slowdown in nominal GDP growth to historical trend levels would cause the Domar condition to fail as early as FY2028, increasing fiscal risks.

Table of Contents

• Medium-term simulation of average interest rate on Japanese government debt and the Domar condition
• Chart 1. 10y JGB yield assumptions for three scenarios
• Chart 2. Simulation of weighted average coupon rate under several scenarios
• Important Disclosure Information
• Analyst Certification
• Disclaimer

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