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Abstract：The Bank of Japan (BOJ) has signaled a decisive shift away from its ultra-loose monetary past, with December meeting minutes revealing a policy board far more hawkish than market consensus anticipated. This development sets the stage for a high-stakes clash between monetary tightening and the government's massive fiscal expansion.
The Bank of Japan (BOJ) has signaled a decisive shift away from its ultra-loose monetary past, with December meeting minutes revealing a policy board far more hawkish than market consensus anticipated. This development sets the stage for a high-stakes clash between monetary tightening and the government's massive fiscal expansion.
The minutes from the December 19 policy meeting, where the BOJ raised rates to 0.75%—the highest since 1995—indicate that policymakers view current real interest rates as critically low. One member explicitly stated that the policy rate remains “at a considerable distance” from the neutral rate, which internal studies estimate falls between 1% and 2.5%.
This rhetoric contradicts Governor Kazuo Ueda‘s more cautious public stance regarding the difficulty of pinpointing the neutral rate. The divergence suggests that the central bank’s internal momentum for normalization is accelerating, driven by concerns over the yen's depreciation and its inflationary byproducts.
The explicit discussion of a “series of hikes” has prompted a repricing of Japanese Government Bonds (JGBs). Market swaps are now pricing in a terminal rate potentially reaching 1.5%, with the next hike anticipated within six months.
The central bank's tightening path faces a formidable obstacle: the governments aggressive fiscal policy. The Prime Minister's administration has unveiled a 122 trillion yen fiscal expansion package. This massive injection creates a classic “policy collision”—fiscal expansion fueling demand while the monetary authority attempts to cool it down.
Analyst View: This divergence is historically volatile for currency markets. If the BOJ is forced to hike aggressively to counteract fiscal inflation, yield spreads could tighten rapidly, offering significant upside support for the Japanese Yen (JPY) against the Dollar and Euro in Q1 2026.
Disclaimer:
The views in this article only represent the author's personal views, and do not constitute investment advice on this platform. This platform does not guarantee the accuracy, completeness and timeliness of the information in the article, and will not be liable for any loss caused by the use of or reliance on the information in the article.
Despite the Bank of Japan’s (BOJ) attempts to normalize policy, the Japanese Yen faces a grim trajectory, with major institutions including JPMorgan and BNP Paribas forecasting a slide to 160 or lower against the Dollar by late 2026. The consensus is shifting from cyclical weakness to a narrative of "structural decline."
Japan’s currency is facing renewed selling pressure as Prime Minister Sanae Takaichi’s government unveils a record-breaking fiscal package, effectively neutralizing the market impact of the Bank of Japan’s (BOJ) historic pivot away from ultra-loose monetary policy.
The Bank of Japan (BOJ) is facing a critical credibility test as bond markets signal that the central bank is dangerously behind the inflation curve.
The Japanese Yen remains trapped in a complex policy tug-of-war as the government unveils record-breaking fiscal spending plans, potentially undermining the Bank of Japan's (BOJ) efforts to normalize monetary policy. While USD/JPY hovers near 156.00, the divergence between fiscal expansion and monetary tightening suggests volatility ahead for 2026.
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