Market News
Japan's central bank holds rates steady after bond sell-off and ahead of elections
BY Quirino Mealha
The BoJ held off on hiking its headline rate on Friday as expected, following signs of panic in Japan's bond market this week.
Just last month, the Japanese central bank raised its key interest rate to 0.75%, a 30-year high, in a bid to normalise fiscal policy after a long era of near-zero or negative rates.
In its latest update, the BoJ also lifted its GDP growth expectations for 2025 to 0.9% and to 1% for this fiscal year. Both figures represent an increase from the 0.7% previously forecasted.
The decision to hold allows the Japanese economy to digest the December hike but it does not fully address the fear that spooked global markets this week, namely surrounding Japan's national debt and political instability.
This Tuesday, Japanese bonds suffered a historic rout, with the yield on the 40-year note surpassing the 4% mark for the first time since 2007. The 30-year bond yield also rose almost 30 basis points during the session, to roughly 3.9%, the highest level on record.
The catalyst for the sell-off was Prime Minister Takaichi's announcement on Monday that snap elections will be held on 8 February, and the pledge to suspend the 8% consumption tax on food for two years, in an attempt to woo voters.
The annual revenue from the tax is roughly ¥5tr (€31.5bn), and with markets already concerned about Japan's debt-to-GDP ratio hovering near 240%, the highest in the developed world, the prospect of an unfunded tax cut has become controversial.
Prime Minister Takaichi also unveiled a spending package of roughly ¥21.5tr (€115bn), further fuelling criticism of fiscal recklessness.
These domestic policy decisions have drawn uncomfortable comparisons to Liz Truss’s disastrous "mini-budget" of unfunded tax cuts in the UK, back in 2022.
Politics vs. Economics
Sanae Takaichi took office in October 2025 becoming Japan’s first female prime minister, following the resignation of her predecessor, Shigeru Ishiba, after a series of political setbacks.
Takaichi's party, the ruling right-wing Liberal Democratic Party (LDP), lost its majority in the upper house. The long-standing coalition with the centrist party, Komeito, which withdrew over a political funds scandal, collapsed.
Nonetheless, the LDP formed a new coalition with the centre-right Japan Innovation Party (JIP), and under Takaichi's leadership, it has held a slim majority and enjoyed high approval ratings, particularly among young voters.
