December Japan Financial Market: The Out-of-Control Turbulence of a 30-Year Change
In December 2025, the Japanese financial market is undergoing a critical turbulence that could rewrite the landscape of nearly 30 years.
The Bank of Japan has intervened for the first time in thirty years, raising the benchmark interest rate to a high of 0.75%. Finance Minister Katayama has also issued the strongest signals of currency market intervention recently, intending to set a 'safety valve' for the market.
However, the market's response has caught the Japanese government off guard with a 'counterattack': the yen's short-term volatility is like a raging wave, yet it remains difficult to escape the quagmire of weakness, with the exchange rate against the dollar once approaching the 157 mark.
The Japanese bond market has also shown violent turbulence, with the 10-year government bond yield breaking through the critical 2% line, reaching a new high not seen in nearly a quarter of a century.
This seemingly contradictory performance is, in fact, an inevitable consequence of the Bank of Japan repeating the mistakes of the 1990s.
Looking back, even in the midst of great deflation, Japan still held a strong foundation accumulated during the 'economic golden period' of the 70s and 80s.
Now, the situation is drastically different, with continuous conflicts with Western neighbors, and internally exposed issues such as ambiguous policy signals, unchanged interest rate differentials, mismatched fiscal and monetary policies, and high debt levels.
The era of ultra-loose monetary policy has come to an end, and Japan, struggling to emerge from the quagmire of deflation, is facing the triple severe challenges of stagflation, monetary fiscalization, and fiscal deficit.