Japan’s cabinet approved a 21.3 trillion yen ($135.5 billion) stimulus package on Friday, marking the nation’s largest economic intervention since the COVID-19 pandemic.
The news immediately pushed the yen to its lowest level against the US dollar since January 2025 and sent the nation’s 40-year bond yield to a record 3.697%.
Stimulus Details and Economic Context
The package centers on three goals: easing rising prices, driving robust growth, and boosting defense and diplomacy. According to the NHK report, it includes local government grants and energy subsidies, expected to benefit households by around 7,000 yen over three months.
Defense spending is also a major part of the plan to reach 2% of GDP by 2027. The supplementary budget should pass by year-end with allied support, though the ruling coalition holds just 231 of 465 Lower House seats.
Japan’s economy has recently faltered. The country’s GDP fell 0.4% quarter-on-quarter in Q3 2025, equal to a 1.8% annualized contraction—the first decline in 18 months. Inflation has stayed above the Bank of Japan’s 2% target for 43 consecutive months, reaching 3% in October 2025. The government expects the stimulus to lift real GDP by 24 trillion yen, with a total economic impact near $265 billion.
Despite initiatives to spark growth, some market observers remain skeptical. Nikkei reports lingering caution about the continued use of fiscal stimulus beyond emergencies. The price of five-year credit default swaps on Japanese government bonds jumped to 21.73 basis points—its highest in six months—on November 20, reflecting investor worries about default risk.
Currency Weakness and Bond Market Turmoil
The yen’s sharp decline after the announcement has sparked fresh concerns over currency stability and potential government intervention. Despite prior support efforts, the massive fiscal boost, combined with stubborn inflation, may drive capital outflows. While October exports rose 3.6% year over year, this modest increase has not offset broader concerns.
Markets are now watching the 40-year bond yield, which hit a historic 3.774% on Thursday. Usually, such measures would lower long-term rates by adding liquidity, but the recent rise signals worries about future inflation and fiscal health. Every 100-basis-point jump in yields raises annual government financing costs by approximately 2.8 trillion yen, fueling fears of unsustainable debt servicing.
This yield rise puts pressure on the $20 trillion yen-carry trade, where investors borrow yen cheaply to invest overseas. Higher yields and yen appreciation could spark a quick unwinding, forcing asset sales worldwide. Historical data show a 0.55 correlation between yen carry trade unwinding and S&P 500 declines.
Implications for Bitcoin and Risk Assets
The stimulus sends mixed signals for Bitcoin and other risk assets. More liquidity often supports demand for alternatives, especially when local currencies lose value. A weaker yen typically drives Japanese investors toward alternative assets such as Bitcoin. The Bank of Japan has kept its key rate at 0.5%, but a hike is possible if inflation persists.
Analysts call this one of the strongest macro tailwinds for Bitcoin as 2026 approaches. Japan’s move, along with potential US Federal Reserve easing, US Treasury cash draws, and weekly liquidity injections from China, creates an environment that could help risk assets gain value.
Still, higher bond yields pose a risk. If they lead to unwinding the yen-carry trade, the resulting outflows may force institutions to sell investments, including Bitcoin holdings. Crypto markets, which trade around the clock, remain sensitive to sharp deleveraging—often mirroring moves in broader markets.
