The Bank of Japan is poised to raise interest rates for the first time since January, potentially pushing them to their highest level in 30 years. This move is expected to intensify turmoil in debt markets, as yields on Japanese government bonds have already risen in recent weeks amid concerns about Prime Minister Sanae Takaichi’s budget discipline. At the same time, a weakening yen is adding to inflationary pressures.
Japan’s economy contracted 0.6 % in the third quarter, but Bank of Japan Governor Kazuo Ueda has said the impact of U.S. tariffs has been less severe than anticipated. He noted that U.S. corporations have absorbed much of the tariff burden without fully passing it on to consumers. Inflation, however, remains above the Bank’s 2 % target, with core consumer prices up 3.0 % in October.
Most economists expect the Bank of Japan to lift its main rate from 0.5 % to 0.75 %, the highest since 1995, as an effort to keep inflation in check—a development that would please Prime Minister Takaichi. The government has also approved an extra budget of 18.3 trillion yen to fund a stimulus package for households, but more than 60 % of the spending will come from government borrowing, reviving concerns about Japan’s fiscal health. Japan already has the largest debt‑to‑GDP ratio among major economies, and the International Monetary Fund projects it will reach 232.7 % this year.
Yields on 30‑year bonds have hit a record high, and 10‑year yields are at their highest level in 19 years. The Bank of Japan’s rate hike is expected to have significant implications for the country’s economy and financial markets. As worries about Takaichi’s fiscal policy mount, the yen is likely to remain under pressure, fueling inflation and offsetting the effects of economic stimulus measures. According to Takahide Kiuchi of the Nomura Research Institute, these factors will undermine the medium‑ to long‑term stability of the economy and financial markets, highlighting the contradictions in the Takaichi administration’s proactive fiscal policy.
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