Japan’s economy is navigating a challenging policy landscape as monetary and fiscal directions diverge. While the Bank of Japan, led by Governor Kazuo Ueda, signals potential interest-rate hikes, the government is charting an expansionary fiscal course.
In its preliminary FY2026 budget request, the Ministry of Finance allocated 32.38 trillion yen to service government debt—up from 28.22 trillion yen in FY2025, marking a record high. This surge in bond expenditures contrasts sharply with the central bank’s tightening stance.
On December 17, 2025, the yield on newly issued 10-year Japanese government bonds briefly reached 1.978 percent, the highest since June 2007. Against a backdrop of elevated public debt and a fragile recovery, this policy mismatch has unsettled the bond market and raised fresh concerns.
Persistent inflationary pressures underpin the Bank of Japan’s cautious pivot. In October 2025, core consumer prices rose 3.0 percent year on year—exceeding the 2 percent target for 50 consecutive months. Rising costs for essentials like food and energy are eroding household budgets.
Meanwhile, the yen’s depreciation to around 157 per US dollar approaches intervention territory, intensifying imported inflation. For travelers and digital nomads, a weaker yen can boost spending power abroad, but higher import prices hit tech gadgets and living costs at home.
As policymakers debate the path forward, global investors and entrepreneurs are watching closely. Will rate hikes stabilize the currency and rein in inflation, or will record fiscal spending delay Japan’s return to robust growth? The answers will shape the economic outlook in 2026 and beyond.
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Japan's economy faces multiple tests amid policy crosscurrents
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