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The Japanese government approved its largest economic stimulus package since the pandemic on Friday, November 21, 2025, with a massive value reaching ¥21.3 trillion (approximately $135 billion USD). Although the stated goal is to support an economy that contracted in the third quarter and to combat inflation pressing households, the immediate repercussions of this expansionary fiscal policy were tremors in the currency and bond markets, presenting Tokyo’s monetary authorities with a complex dilemma.
Generous Spending: Fiscal Deterioration and a Weaker Currency
This colossal package comes at a critical juncture, as the Japanese economy faced a contraction for the first time in six quarters. To fund this expenditure, which includes substantial tax cuts and cash support for households, along with strategic investments in future growth sectors like semiconductors and Artificial Intelligence (AI), the government plans to issue new bonds.
This step has led to an immediate deterioration in the country’s fiscal outlook, which already suffers from the world’s highest public debt-to-GDP ratio. Amid rising concerns over the increased supply of government debt, yields on Japanese Government Bonds (JGBs), especially the long-term 40-year bonds, have hit record highs. This surge represents a major structural challenge, increasing the cost of debt servicing and putting significant pressure on the state budget.
The Yen Under Threat and the Brink of Intervention
Coinciding with the fiscal deterioration, the Japanese Yen has been exposed to further weakness, as markets interpret the increased liquidity and government spending as a downward pressure factor on the currency’s value. In an attempt to deter traders from selling the Yen, Japanese authorities have escalated their verbal warnings. Government officials have affirmed they will not hesitate to take “appropriate action” against any excessive or disorderly market volatility, sending clear signals about the possibility of direct intervention to support the currency.
These threats, which have become stronger in recent days, have temporarily succeeded in curbing the Yen’s decline, prompting speculators to exercise extreme caution near its recent lows.
Policy Conflict: The Central Bank in a Bind
The stimulus package puts the Bank of Japan (BoJ) in an unenviable position. The government is pursuing an expansionary fiscal policy, while the central bank finds itself obliged to fight inflation, which has persisted above its 2% target for years.
The Rate Hike Dilemma: On one hand, persistent inflation and a weak Yen (which pushes prices higher) suggest the need to raise interest rates to solidify price stability. The BoJ Governor has left the door open for a potential increase in December or January.
Deflationary Pressure: On the other hand, the economic contraction recorded in the third quarter strongly pressures the Bank to postpone any move toward monetary tightening.
This contradiction between the monetary necessity (fighting inflation) and the economic necessity (supporting slowing growth) creates market uncertainty regarding the future path of the Bank of Japan’s policy.
The Retreating Dollar as a Counterbalance
On the other side of the USD/JPY currency pair equation, the US Dollar is facing its own headwinds. Recent comments from Federal Reserve officials have increased market bets on an imminent rate cut in the United States, with markets currently pricing in an over 80% chance of lowering borrowing costs at the December meeting. This expectation limits any significant gains for the Dollar and acts as a counterweight to the Yen’s stimulus-induced weakness, leaving the currency pair in a volatile trading range.
Markets are now anticipating upcoming US data (Producer Price Index and Retail Sales), which will determine the strength of US rate cut expectations and, consequently, play a key role in setting the short-term direction for the USD/JPY pair.
