Japan’s Fiscal Expansion and BOJ Rate Hike Plans Spark Bond Market Nervousness

This analysis is based on the Wall Street Journal report [9] and additional sources, exploring the conflict between Japan’s expansionary fiscal policy and tightening monetary stance. Prime Minister Takaichi’s cabinet approved a ¥21.3 trillion ($135–137 billion) stimulus package—Japan’s largest since COVID-19—to ease energy inflation [3][4]. Concurrently, the BOJ plans to raise its policy rate from 0.5% to 0.75% in December 2025 (80% market-priced probability), even as the government historically favored reflationist policies [1][2][3]. The Nikkei 225 index fell 3.45% between November 4 and December 5, 2025, reflecting broad market uncertainty [0]. In the JGB market, long-term (20-year, 30-year) yields hit 1999 highs [5][6], and a November 2025 30-year JGB auction recorded the lowest demand since June (bid-to-cover ratio 3.12) [6]. Bank of America projects net JGB supply will rise by ¥11 trillion in 2026, while the BOJ reduces its bond purchases—creating a supply-demand imbalance [4]. Japan’s public debt-to-GDP ratio (over 260%, highest among major economies) amplifies risks of rising debt-servicing costs from higher rates [7].

1. Policy Contradiction
   : The stimulus aims to ease inflation, but increased borrowing could weaken the yen (down 6.7% vs. the dollar since Takaichi’s election) [3], raising import prices and undermining the package’s intended effect.
2. Global Spillovers
   : Rising JGB yields may prompt Japanese investors to repatriate overseas capital, potentially pushing up global bond yields [2].
3. Fiscal-Monetary Divergence
   : The BOJ’s rate hike (driven by 2+ years of above-target inflation [8]) marks a rare departure from the government’s historical reflationist agenda, highlighting the challenges of navigating policy normalization amid fiscal expansion.

:

• Domestic
  : Higher debt-servicing costs could divert funds from public services; yen weakness will increase household costs for imported energy and food [3].
• Global
  : Spillovers to global bond markets from Japanese capital repatriation [2].
• Market
  : Further JGB yield spikes and equity market volatility remain likely [0][5].

:
Limited upside includes potential higher returns for Japanese domestic investors if rates rise, though this is offset by broader economic and market risks.

• Stimulus package: ¥21.3 trillion (Japan’s largest since COVID-19) [3][4]
• BOJ rate hike plan: 0.5% → 0.75% in December 2025 (80% market probability) [1][2][3]
• Nikkei 225 performance: -3.45% (Nov 4–Dec 5, 2025) [0]
• JGB market: 20/30-year yields at 1999 highs; 30-year auction bid-to-cover ratio 3.12 (Nov 2025) [5][6]
• Public debt-to-GDP: >260% (highest among major economies) [7]
• Yen performance: -6.7% vs. the dollar since Takaichi’s election [3]