The Japanese yen exchange rate reached 157.89, hitting a ten-month high. Japan's 21.3 trillion yen stimulus package triggered a chain reaction in the market.

The Japanese government announced on November 21st the launch of an economic stimulus package totaling 21.3 trillion yen, the largest additional fiscal expenditure since the pandemic. The market immediately responded strongly to the outlook for the yen. Driven by these expectations, the USD/JPY surged to 157.89 on November 20th, reaching a new high in the past ten months.

Scale and Structure of the Fiscal Stimulus Plan

The funding focus of this economic plan is on price relief measures, with 11.7 trillion yen allocated to ease inflationary pressures, covering areas from consumer price support to strategic industry investments. The sources of funding include expected tax revenue growth and new government bond issuance. The Japanese Cabinet plans to approve the supplementary budget on November 28th, aiming for parliamentary approval before the end of the year.

Yen Depreciation and the Malignant Cycle of Long-term Bond Yields

After the policy announcement, market concerns about Japan’s fiscal sustainability increased significantly. The yield on 10-year Japanese government bonds rose to 1.842%, the highest level since the 2008 financial crisis. The rising yields further pressured the yen, creating a cycle of fiscal expansion → rising bond yields → yen depreciation.

Bank of Japan Governor Ueda Kazuo expressed deep concern about this. He pointed out that the continued weakness of the yen would further push up domestic inflation through rising import prices. Companies, facing increased costs, tend to raise wages and product prices, posing a potential threat to price stability. Ueda emphasized that the transmission mechanism of exchange rate fluctuations to prices is more sensitive than before, and the central bank must remain vigilant.

December Rate Hike Expectations as a Decisive Factor

The market’s current focus is on whether USD/JPY can break through the 160 level. Notably, Japanese authorities have intervened multiple times at the 160 mark over the past year. Roderigo Catril, FX strategist at National Australia Bank, offers a relevant perspective: historical intervention experiences show that without supporting fiscal discipline or monetary policy, market interventions often encourage short-selling of the yen.

At this critical moment, whether the Bank of Japan raises interest rates in December will be key to the yen’s direction. If the central bank hikes rates, USD/JPY is expected to retreat below 150; conversely, if the BOJ remains on hold, breaking through 160 will only be a matter of time. Ueda Kazuo’s recent statements suggest the central bank leans toward supporting a rate hike, which could be an important turning point to reverse the yen’s downward trend.

Currently, the pressure on the yen exchange rate stems from the asymmetry between fiscal and monetary policies—the inflation expectations released by the large-scale stimulus and the cautious stance of the central bank are in a game of tug-of-war. The final policy choice will profoundly influence the future performance of the yen exchange rate.