Grab your matcha latte ☕ and let’s dive into why Japan’s economy is feeling the heat! Recently, two key policies have been heading in opposite directions, putting Tokyo at a serious crossroads.
On the one hand, the Bank of Japan’s governor has hinted at possible interest-rate hikes to tackle rising prices. This tightening stance has sent long-term yields higher, and on December 17, 10-year government bond yields briefly hit 1.978%, their highest level since June 2007.
On the other hand, Japan’s Ministry of Finance is ramping up spending. In its draft budget for fiscal year 2026, bond servicing costs—what the government pays in interest and principal on its massive debt—are set at 32.38 trillion yen, up from 28.22 trillion yen this year. That’s a record high.
Why the mismatch? Persistent inflation and a weak yen are part of the story. This October, core consumer prices were up 3.0% year-on-year, marking over 50 months above the BOJ’s 2% target. At the same time, the yen has slid to around 157 per US dollar, flirting with intervention levels. Higher rates seem essential to cool imported inflation and steady the currency.
With debt servicing at record levels and policy pulling in two directions, Japan’s leaders face a tricky balancing act. Will rate hikes cool inflation without choking recovery? Or could expanding debt drag on growth? Stay tuned as Tokyo navigates this economic tug-of-war 🤔
Reference(s):
Japan's economy faces multiple tests amid policy crosscurrents
cgtn.com
