Japanese Fiscal Stimulus Sparks Bond Market Volatility and Foreign Capital Shifts

Foreign capital flows into Japanese government bonds (JGBs) surged in the week to November 15, with net purchases of 961.6 billion yen ($6.11 billion) in long-term instruments, marking the largest weekly inflow since October 4. This coincided with a government proposal to expand its fiscal stimulus package to 25 trillion yen, pushing the benchmark 10-year JGB yield to a 17.5-year high of 1.8% . However, sentiment soured as concerns over fiscal sustainability intensified, triggering a sharp selloff in JGBs by the following week. The 30-year JGB yield (JP30YTN=JBTC) hit an unprecedented 3.39%, while the 20-year yield (JP20YTN=JBTC) climbed to 2.85%, its highest since June 1999 .

The fiscal expansion under Prime Minister Sanae Takaichi reflects a deliberate shift toward reflationary policies, with the proposed 21.3 trillion yen stimulus far exceeding last year’s 13.9 trillion yen package. This has raised concerns about Japan’s debt trajectory, which already stands at over 260% of GDP. Analysts note that the government’s focus on infrastructure and social welfare spending, combined with the Bank of Japan’s (BOJ) accommodative stance, risks accelerating inflationary pressures .

Market dynamics further complicated the outlook. While foreign investors initially flocked to Japanese bonds and stocks—driven by a 4.2% rally in the Nikkei 225 index following Nvidia’s (NVDA) strong earnings guidance—subsequent fiscal jitters reversed the trend. The yen depreciated to 157.48 per dollar, its weakest since January 15, exacerbating inflation risks and prompting speculation about earlier BOJ rate hikes . Senior strategist Katsutoshi Inadome of Sumitomo Mitsui Trust Asset Management warned that “super-long yields are on track to rise further on worsening fiscal health,” while BOJ board member Junko Koeda emphasized the need to normalize monetary policy to avoid future distortions .

The interplay between fiscal and monetary policy has created a fragile equilibrium. Although the BOJ has maintained its yield curve control framework, the government’s aggressive stimulus has strained market confidence. A meeting between BOJ Governor Kazuo Ueda and economic ministers underscored the urgency of addressing market volatility, with Finance Minister Satsuki Katayama acknowledging the need to monitor developments closely . Meanwhile, Japanese investors have turned to overseas assets, net purchasing 348.4 billion yen in foreign long-term debt and 183.3 billion yen in foreign stocks, signaling a shift in risk appetite .

Globally, Japan’s fiscal expansion has broader implications. As a key driver of regional economic growth, its policy trajectory could influence capital flows in Asia and pressure central banks elsewhere to adjust monetary frameworks. The yen’s depreciation, meanwhile, has drawn comparisons to the 1990s deflationary crisis, raising questions about the sustainability of current strategies .