The yen's depreciation pressure remains strong, and the central bank's rate hike in December becomes crucial—can the 21 trillion yen economic stimulus turn the tide?

Japan Launches Largest Stimulus Package in Recent Years, Market Concerns Emerge

In mid-November, the Japanese government announced an economic support plan totaling 21.3 trillion yen, the largest additional fiscal injection since the pandemic. The plan is mainly divided into two areas: the largest expenditure—11.7 trillion yen—is allocated to easing price pressures, while the remaining funds are invested in strategic industry development and infrastructure construction.

Funding sources include two parts: first, increased tax revenues under inflationary conditions; second, newly issued government bonds. According to Japan’s timetable, the supplementary budget is expected to receive Cabinet approval by the end of November and to be approved by the parliament before the end of the year.

Bond Market Reacts Sharply, Yen Falls to Ten-Year High

The news of large-scale fiscal stimulus triggered a chain reaction in the markets. On November 20, the yield on Japan’s 10-year government bonds soared to 1.842%, the highest level since the 2008 financial crisis. Meanwhile, the USD/JPY exchange rate fell to 157.89, hitting a near ten-month low, with the decline accelerating.

What does this data reflect? On one hand, the sharp fluctuations in the bond market suggest investor concerns about the sustainability of Japan’s long-term debt; on the other hand, the continued depreciation of the yen is pushing up import prices, further increasing domestic inflationary pressures.

Central Bank Attitude Changes: Calls for Rate Hikes Rise

Bank of Japan Governor Kazuo Ueda recently stated clearly that the yen’s weakness is a double-edged sword—while it benefits exports in the short term, in the long run, rising import costs will be passed on to consumers, and both businesses and consumers tend to raise prices and wage demands, thereby expanding inflation expectations.

He emphasized that the pass-through effect of exchange rates on prices is becoming increasingly direct, and the central bank cannot sit idly by. This statement essentially signals his inclination to favor rate hikes at the December policy meeting—raising interest rates to attract international capital inflows and support the yen.

The 160 Level Becomes a Watershed, How Do Market Participants View It?

The market is watching the 160 psychological threshold, as Japanese authorities have intervened multiple times around this level. Roderigo Catril, FX strategist at National Australia Bank, offers a representative view: historical intervention data show that pure market intervention has limited effect, and without supporting tightening policies, opportunities to short the yen still exist.

His forecast is: if the central bank indeed raises interest rates in December, USD/JPY could return below 150; conversely, breaking through 160 is only a matter of time. In other words, the future direction of the yen is in the hands of the central bank’s decisions.

Japan’s Exchange Rate Outlook: Policy Signals Will Be Decisive

Overall, Japan faces a dilemma—its economy needs stimulus but its fiscal situation is already strained, the yen needs support but rising interest rates could impact debt costs. The 21.3 trillion yen economic plan can alleviate short-term difficulties, but fundamentally solving the yen’s depreciation depends on the central bank’s policy actions. The December rate hike meeting will be decisive for the yen’s exchange rate.