Bank of Japan (BoJ) Governor Kazuo Ueda rattled markets Monday morning as the central bank signalled it is set to embark on the long-awaited process of tightening its monetary stance.
“If the outlook for economic activity and prices outlined so far is realised, the bank, in accordance with improvement in economic activity and prices, will continue to raise the policy interest rate and adjust the degree of monetary accommodation,” Ueda said in a speech to business leaders.
The message was clear, and markets reacted accordingly. Stocks declined, with the Nikkei 225 dropping 1.9% and the Topix falling 1.2%.
Bitcoin (BTC), already struggling against a backdrop of volatile Thanksgiving trading activity, plummeted to a low of under $84,000, effectively erasing the entirety of last week's gains. The Japanese government benchmark 10-year bond yield jumped to its highest level in 17 years, at 1.88%.
Ueda had foreshadowed a rate increase earlier in November, suggesting that Japan was making progress in meeting the conditions for raising interest rates. He noted that currency movements may now have a greater impact on inflation as companies have become more willing to raise prices and wages. Ueda is not alone; other board members who have indicated leaning for a rate increase include Kazuyuki Masu and Junko Koeda.
The BoJ had already ended its decade-long stimulus programme last year and lifted its policy rate to 0.5% in January.
What makes this shift different is that it runs directly counter to the government’s expansionary fiscal stance, as new Prime Minister Sanae Takaichi is preparing for another large spending splurge.
Expansionary fiscal policy, high debt
Prime Minister Takaichi, elected in October, has pledged a large fiscal spending stimulus package worth ¥21.3tn ($135.4bn).
It is designed in part to cushion Japan’s export-dependent economy from the fallout of US tariffs and seeks to channel investment into national security priorities, including AI and shipbuilding. The spending is expected to be funded by additional debt issuance, raising questions about Japan’s fiscal discipline.
Japan’s public finances stand out internationally and are a frequent subject of market speculation. Its public debt is the highest among advanced economies, with general government gross debt at roughly 250% of GDP as of 2025, according to the Ministry of Finance.
Government bond issuance remains essential to fill the persistent primary deficit, which stems from structurally rising social security spending driven by rapid population aging and a shrinking workforce.
But there are numerous reasons why the yields on government debt haven't spiked uncontrollably, and Japan hasn't faced a "Liz Truss moment".
Despite the considerable stock of public debt, approximately 88% of bonds are held domestically, primarily by banks, insurers, pension funds, and the Bank of Japan.
Meanwhile, Japan’s net public liabilities amount to only 78% of GDP, as the government also holds substantial assets. These assets are allocated to higher-risk, higher-return investments, including domestic stocks, foreign equities, and overseas bonds.
Therefore, liabilities are primarily composed of low-return items, such as bank reserves and government bonds, while assets are invested in higher-return assets. The high returns of the assets offset the low-yielding liabilities.
However, foreign investors have become increasingly influential in secondary markets, accounting for nearly half of spot trading and more than three-quarters of futures trading.
As the yen remains undervalued, Ueda’s hints at a possible rate hike have prompted some investors to start rebuilding long positions in the currency. The BoJ now faces a dilemma: accelerate interest rate hikes despite political pressure to hold off as the government eases, or risk allowing the yen to weaken even further.
Unconventional Monetary Policy
The BoJ has a reputation for making bold policy choices.
It was the first central bank to introduce large-scale asset purchases - quantitative easing - back in 2001. Following the 2009 financial crisis, it continued with aggressive stimulus measures, subsequently expanding its initial QE programme in 2011, 2013, and 2014.
In addition, in 2016, the BoJ introduced the yield curve control policy – buying or selling bonds as needed to keep government bond yields near determined levels. As a result, the BoJ kept 10-year government bonds close to 0%.
It also continued expanding large-scale asset purchases well after central banks slowed or reversed course.
Global footprint and crypto reach
Along with the US dollar and Swiss franc, the Japanese yen is one of the world’s key safe-haven assets, and the country plays a significant role in global financial markets.
During times of market stress, investors typically buy yen and Japanese government bonds, resulting in the currency appreciating.
Japan had been the second-largest net creditor in the world for over three decades (after China) until it was overtaken by Germany last year. Its households, pension funds, and institutions hold trillions in overseas assets, giving Japan enormous influence over global capital flows. Changes in Japanese yields often trigger large repatriation or outward-investment waves that ripple across bond and currency markets worldwide.
The country's long-standing ultra-low rates have made the yen the funding currency of choice for global carry trades. Investors borrow cheaply in yen to invest in higher-yielding assets abroad.
In addition, Japan is home to enormous institutions, including the Government Pension Investment Fund (GPIF), the world’s largest pension fund.
Japan’s outsized role in global financial markets increasingly matters for crypto as well. Shifts in BoJ policy impact global liquidity and risk appetite, while steps by regulators to onshore domestic crypto activity are likely to further exacerbate future moves.
Expectations of BoJ tightening can trigger rapid unwinds, sending volatility through currency, bond and equity markets and spilling over into crypto – as we saw yesterday. As a result, changes in Japan’s monetary stance and broader financial positioning are part of the macro backdrop shaping the behaviour of digital assets.
The BoJ’s next rate-setting decision is scheduled for 19 Dec. The world will be watching.
