The Japanese Yen exchange rate continues to hit new highs, and Japan's large-scale stimulus plan raises inflation concerns

Unprecedented Economic Support Plan Boosts Market Concerns

On November 21, the Japanese Cabinet officially approved an economic support plan totaling 21.3 trillion yen, marking the largest single additional investment since the pandemic. This decision immediately triggered a chain reaction in the financial markets, with the USD/JPY rising to 157.89, hitting a new high in the past ten months.

The funding allocation of the plan reflects Japan’s policy priorities: over half of the funds (11.7 trillion yen) will be directly used for price relief measures to address the long-term cost-of-living pressures. The remaining funds will be invested in industrial upgrades and key sector support. Sources of fiscal funds include increased inflation tax revenue and new government bond issuance. The plan is expected to be approved for supplementary budget as early as November 28, aiming for parliamentary approval before the end of the year.

Yen Continues to Weaken, Triggering Central Bank Policy Signals

The large-scale fiscal stimulus has further pressured the yen exchange rate. On November 20, Japan’s 10-year government bond yield broke through 1.842%, reaching the highest level since 2008. The market generally believes that the substantial bond supply will further depress the yen’s value.

Bank of Japan Governor Kazuo Ueda expressed clear concerns about this. He pointed out that the ongoing depreciation of the yen is intensifying imported inflation pressures—rising costs of imported goods are forcing companies to adjust wages and prices more quickly. Ueda emphasized that the impact of exchange rate fluctuations on price transmission has significantly exceeded previous levels, and the central bank must remain vigilant. This statement was interpreted by the market as a signal of potential rate hikes, making the December policy meeting particularly noteworthy.

The 160 Level Becomes a Market Dividing Line

Market traders are focusing on the psychological threshold of 160—an area where Japanese authorities have intervened multiple times last year. ANZ Forex Analyst Rodrigo Catril pointed out that pure exchange rate interventions are unlikely to be effective unless accompanied by clear fiscal discipline or monetary policy adjustments. In his assessment, if the Bank of Japan indeed chooses to raise interest rates, USD/JPY could fall back below 150; otherwise, breaking through 160 will be difficult to prevent.

The outlook for the yen ultimately depends on the central bank’s policy choices—raising interest rates will be a key step in reversing the downward trend.