Japan’s 10-year government bond yield fell to around 2.05% on the final trading day of the year, retreating from a near 27-year high reached last week amid growing concerns over the country’s fiscal outlook. The cabinet recently approved Prime Minister Sanae Takaichi’s record 122.3 trillion yen budget, seeking to balance aggressive fiscal spending with debt management by curbing new bond issuance. It marks the first budget under the Takaichi administration and is set for submission to the Diet in January. However, with public debt already more than twice the size of the economy, Japan remains highly vulnerable to rising borrowing costs, limiting Takaichi’s room for bold stimulus measures. On the monetary side, the Bank of Japan raised its policy rate to a thirty-year high of 0.75%, with markets eyeing the July policy meeting as the most likely opportunity for the next rate hike. However, an earlier move could be triggered if the yen continues to weaken.
