- Japan’s 40-year government bond yield rose to 3.774% on Thursday
- The five-year CDS spread reached 21.73 basis points on November 20
- GDP contracted in Q3 2025 and inflation hit 3% in October
Japan’s new stimulus measures have triggered sharp reactions across global markets: the yen plunged to its weakest level versus the U.S. dollar since January 2025, and long-term government bond yields climbed to multi-year highs.
The cabinet approved a 21.3 trillion yen package on Friday — the largest fiscal package since the COVID-19 crisis — and the announcement immediately shifted expectations in currency, bond, and crypto markets.
The scale of the support and the pressure it places on Japan’s fiscal position are forcing investors to reassess global risk pricing.
Economic reset
The package is designed to ease price pressures, support growth, and strengthen Japan’s defense and diplomatic capabilities.
Local government subsidies and energy support are core elements of the plan, and households are expected to receive about 7,000 yen each over a three‑month period.
The government also aims to raise defense spending to 2% of GDP by 2027.
An additional budget is expected to pass before year-end, despite the governing coalition currently holding only 231 of 465 seats in the lower house.
These measures come as growth has weakened.
Japan’s GDP fell 0.4% in the third quarter of 2025, equivalent to a 1.8% annualized contraction.
Inflation has remained above the Bank of Japan’s 2% target for 43 months, reaching 3% in October 2025.
Policymakers estimate the new measures will boost real GDP by 24 trillion yen and generate nearly $265 billion in overall economic impact.
Rising market pressure
The fiscal stimulus has heightened concerns about the sustainability of long-term debt and stress in financial markets.
The five-year credit default swap spread for Japanese government debt hit 21.73 basis points on November 20, the highest level in six months.
The yield on the 40-year government bond jumped to 3.697% immediately after the announcement and rose further to 3.774% on Thursday.
Every 100 basis points of higher yields would raise the government’s annual financing costs by roughly 2.8 trillion yen, drawing attention to mounting public finance pressures over time.
Nikkei reported growing caution about the repeated use of fiscal stimulus outside emergency conditions, adding another layer of investor concern.
This debate gains urgency as the yield curve shifts and Japan’s borrowing costs climb.
These moves matter for carry trades involving about 20 trillion yen, where investors borrow yen at low rates and deploy funds into higher-yielding overseas assets.
A combination of higher yields and abrupt currency moves can force rapid unwinds.
Historical data show a 0.55 correlation between yen repatriation flows and declines in the S&P 500, highlighting another source of potential volatility.
Yen reaction
The yen fell sharply following the stimulus announcement, sparking speculation about the currency’s future stability and the possibility of official intervention.
October exports rose 3.6% year-on-year, but that gain was insufficient to allay broader concerns about economic pressures.
The size of the fiscal support and the persistence of inflation have become key factors in interpreting the next moves in global markets.
Crypto shift
These conditions are feeding directly into crypto markets.
A weaker yen tends to push Japanese investors toward alternative assets, including Bitcoin, especially when global liquidity is high.
Analysts note that Japan’s decision adds to a global backdrop that includes Federal Reserve easing, coordinated treasury cash moves, and ongoing liquidity support from China.
Those elements could create conditions that boost crypto demand in 2026.
At the same time, higher long-term yields create risks.
If yen carry trades unwind rapidly, institutions may be forced to sell assets, including Bitcoin, to meet liquidity needs.