While the BOJ proceeds with rate hikes and monetary policy normalization, the government's aggressive fiscal expansion is advancing at the same time. The turning point for reflationary policy and the economy's future focus are examined from the perspectives of government policy and market trends.
In March 2024, the BOJ ended its negative interest rate policy and YCC, taking steps toward monetary policy normalization. At its policy meeting on 30 October 2026, it left the policy rate unchanged at around 1.25% and indicated the possibility of further rate hikes in light of inflation risks. The BOJ's analysis projects that the underlying inflation rate will become established at around 2%. It also indicates signs that 2% inflation is becoming established in wages, price-setting behavior and inflation expectations, while identifying weak private consumption as an issue.
The Takaichi administration has set out a policy centered on "responsible proactive fiscal policy," with an emphasis on investment in crisis management, growth investment and strengthening the competitiveness of domestic industries. It has set a target of more than ¥370 trillion in combined public- and private-sector investment across 17 priority areas by fiscal 2040, and is considering mechanisms to support lending by private banks. As fiscal expansion and the BOJ's monetary policy normalization proceed simultaneously, their impact on government bond yields and corporate borrowing costs is expected to be a market focus.
Future areas of focus will shift to the establishment of the 2% inflation target, the pace of BOJ rate hikes and fiscal sustainability. A proposal is under consideration to increase defense spending to approximately ¥70 trillion–¥80 trillion over the five years from fiscal 2027. Attention will focus on whether fiscal spending will lead not only to economic stimulus but also to higher productivity. How fiscal spending and monetary normalization affect corporate capital investment and wage increases, together with policy decisions at BOJ meetings, will influence market trends.
facts – k: "Period 1", v: "In March 2024, the BOJ ended its negative interest rate policy and YCC, taking steps toward monetary policy normalization.", facts – k: "Period 2", v: "At its monetary policy meeting on 30 October 2026, the BOJ left the policy rate unchanged at around 1.25%.", facts – k: "Scale", v: "The government set a target of more than ¥370 trillion in combined public- and private-sector investment across 17 priority areas by fiscal 2040.", facts – k: "Period 3", v: "The total budget request for fiscal 2027 is expected to reach ¥143.1 trillion.", facts – k: "Nature", v: "Priority is being given to both stimulating demand through fiscal spending and strengthening supply capacity."],
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