Japan's Fiscal Stimulus and the Looming Triple Dip Risk

Japan's economy has entered a precarious phase, marked by a contraction in Q3 2025 and a government response that risks exacerbating cross-asset volatility. The recent ¥17 trillion ($110 billion) stimulus package, announced by Prime Minister Sanae Takaichi, aims to counter rising prices and support strategic sectors like artificial intelligence and semiconductors. However, the measures-while ambitious-raise critical questions about their efficacy and the broader implications for equities, bonds, and the yen. This analysis explores the "triple dip" threat: the simultaneous risks to these three asset classes, driven by fiscal overreach, market uncertainty, and global spillovers.

The Equity Paradox: Stimulus-Driven Optimism vs. Structural Weakness

The Nikkei 225 has surged past 50,000 for the first time in history, fueled by expectations of the ¥14 trillion stimulus package and a continuation of "Abenomics"-style interventions. This optimism is understandable: targeted subsidies for winter energy costs and investments in high-tech industries signal a commitment to growth. Yet, the equity market's resilience masks deeper vulnerabilities. Japan's history of fiscal stimulus reveals a pattern of mixed results. While public employment programs have proven effective in stabilizing employment during crises, direct spending and tax cuts have yielded weaker outcomes. The current focus on capital-intensive sectors like shipbuilding and semiconductors may take years to bear fruit, leaving the economy exposed to near-term headwinds.

Moreover, the yen's potential appreciation-a byproduct of rising bond yields-could undermine export-driven sectors, which constitute a significant portion of the Nikkei's value. As Goldman Sachs notes, tighter financial conditions and higher capital costs may dampen corporate earnings, creating a drag on equities despite short-term stimulus-driven gains.

Bond Yields and the Fiscal Tightrope

Japan's bond market is already reacting to the fiscal stimulus with heightened volatility. The 10-year yield has climbed to 1.72%, its highest since 2008, while 40-year yields hit 3.697%-a level not seen since the early 2000s. These surges reflect investor concerns about Japan's ability to manage its already staggering public debt, which exceeds 250% of GDP. The yen carry trade, a cornerstone of global financial markets, is under threat: as Japanese yields rise, the cost of borrowing in yen increases, potentially forcing investors to unwind leveraged positions and repatriate capital. This dynamic could trigger a self-reinforcing cycle of yen strength and equity market sell-offs in other regions, including the U.S.

Historically, Japan's fiscal interventions have often led to higher bond yields without commensurate growth. For instance, during the 2008 crisis and the 2020 pandemic, stimulus packages failed to prevent prolonged stagnation. The current measures, while larger in scale, face similar challenges. If the Bank of Japan continues its dovish stance-delaying rate hikes despite rising inflation-this could further widen the gap between fiscal and monetary policy, amplifying bond market instability.

The Yen's Fragile Equilibrium

The yen's exchange rate is caught in a tug-of-war between fiscal and monetary forces. On one hand, higher bond yields could attract capital inflows, pushing the yen higher. On the other, the BOJ's reluctance to tighten policy-despite global central banks moving toward normalization-risks undermining confidence in the currency. Goldman Sachs warns that the yen's weakness may persist until mid-December, when the BOJ provides clearer guidance on its rate path.

This uncertainty is compounded by global factors. The U.S. government's establishment of a Strategic Bitcoin Reserve in March 2025, for example, has shifted investor sentiment toward digital assets, indirectly influencing Japan's fiscal calculus. If Japan follows suit by integrating crypto into its reserves or stimulus programs, it could trigger further cross-asset volatility.

The Triple Dip Framework: Interconnected Risks

The "triple dip" threat emerges from the interplay of these three asset classes:
1. Equities: Short-term gains from stimulus may reverse if bond yields and the yen continue to rise, squeezing export sectors and increasing capital costs.
2.
Bonds: Rising yields reflect fiscal concerns and could destabilize the yen carry trade, with global repercussions.
3. Yen: A weaker yen may delay inflation targeting, while a stronger yen could undermine growth.

This framework highlights a paradox: Japan's fiscal stimulus, intended to stimulate growth, may instead amplify volatility across all asset classes. The BOJ's cautious approach-prioritizing stability over aggressive rate hikes-adds to the uncertainty, as does the government's apparent willingness to sacrifice fiscal discipline for short-term gains.

Conclusion: A Delicate Balancing Act

Japan's fiscal stimulus in 2025 represents a high-stakes gamble. While the immediate boost to equities and consumer confidence is welcome, the long-term risks-soaring bond yields, yen volatility, and fiscal unsustainability-cannot be ignored. Investors must remain vigilant, recognizing that the triple dip threat is not a distant possibility but an evolving reality. The coming months will test the resilience of Japan's economy and its policymakers' ability to navigate a complex, interconnected global financial system.