Japan Just Got Much More Expensive Money

2.95%.

That’s where the yield on Japan’s 10-year government bond climbed today — the highest level since 1996.

On its own, that number may not look dramatic. But in Japan, the context is very different.

The country spent much of the past few decades in a world of zero or near-zero interest rates. Cheap financing helped make its enormous government debt more manageable.

Now that model is starting to change.

The higher yields go, the more expensive it gradually becomes to refinance government debt. And Japan is one of the most heavily indebted major economies in the world.

A 2.95% yield on Japan’s 10-year bond therefore means something very different than 2.95% in a low-debt economy.

That puts the Bank of Japan in an uncomfortable position.

If it keeps tightening monetary policy, it could push government financing costs even higher. But if it moves too quickly to suppress yields or starts supporting the bond market more aggressively again, it could create additional pressure on the yen and inflation.

Higher yields are usually negative for gold in the short term. They offer investors more income and can make a non-yielding asset less attractive.

But over the longer term, there’s another side to the equation.

If high interest rates become too expensive for heavily indebted governments, the room to keep them high gradually shrinks.

And Japan isn’t the only country where yields are rising.

That’s why I wouldn’t focus only on today’s move in gold.

I’d watch how long Japan can tolerate a nearly 3% yield on its 10-year debt.