The Bank of Japan is poised to increase interest rates for the first time since January, potentially pushing them to their highest level in 30 years. This move is expected to exacerbate turmoil in debt markets, as yields on Japanese government bonds have already risen in recent weeks due to concerns about Prime Minister Sanae Takaichi’s budget discipline. The yen has also weakened, adding to inflationary pressures.
Japan’s economy contracted 0.6% in the third quarter, but Bank of Japan Governor Kazuo Ueda has stated that the impact of US tariffs has been less severe than anticipated. Ueda noted that US corporations have absorbed the burden of tariffs without fully passing them on to consumers. Meanwhile, inflation has remained above the Bank of Japan’s 2% target, with core consumer prices rising 3.0% in October.
The majority of economists expect the Bank of Japan to raise its main rate from 0.5% to 0.75%, which would be the highest since 1995. This move is seen as an effort to keep inflation in check, which would be a welcome development for Prime Minister Takaichi. The Japanese government has also approved an extra budget worth 18.3 trillion yen to finance a stimulus package aimed at helping households.
However, more than 60% of the planned spending will come from government borrowing, reigniting concerns about Japan’s fiscal health. The country already has the largest ratio of debt to gross domestic product among major economies, with the International Monetary Fund projecting it to reach 232.7% this year. Yields on 30-year bonds have reached a record high, and 10-year yields have hit their highest level in 19 years.
The Bank of Japan’s decision to hike interest rates is expected to have significant implications for the country’s economy and financial markets. As worries about Takaichi’s fiscal policy continue to mount, the yen is likely to remain under pressure, fueling inflation and offsetting the effects of economic stimulus measures. According to Takahide Kiuchi at the Nomura Research Institute, these factors will undermine the medium- to long-term stability of the economy and financial markets, highlighting the contradictions of the Takaichi administration’s proactive fiscal policy.
