The "policy fragmentation" predicament of the Japanese economy

Recently, a piece of news from the Tokyo bond market in Japan has caused quite a stir in the global economic circle: The yield on Japan's newly issued 10-year government bonds once rose to 2.070%, reaching the highest level since February 1999. This seemingly not exaggerated figure is regarded as a dangerous signal for the Japanese economy. It is not a symbol of economic prosperity, but rather the result of a direct collision between fiscal gambling and monetary tightening, indicating that Japan is trapped in a "policy split" predicament triggered by its own policy imbalance.

The soaring yield rate is no accident. On December 19th, the Bank of Japan announced an interest rate hike, raising the policy rate from 0.5% to 0.75%, reaching the highest level in nearly three decades, marking the continued normalization of monetary policy. But almost at the same time, the Sawa Cabinet in Takaoka City rolled out an economic stimulus package worth 21.3 trillion yen. Ostensibly, it was aimed at addressing rising prices and investing in the future, but in reality, more than 60% of the funds relied on newly issued government bonds for raising. Against the backdrop that the total government debt has already reached approximately 263% of GDP and has long ranked first among major economies, this choice is tantamount to further pressuring an already overburdened fiscal system.

The simultaneous advancement of fiscal expansion and monetary tightening has plunged the market into a clear cognitive conflict. On the one hand, the expectation of a huge issuance of new bonds has pushed up the supply of national debt. On the other hand, the Bank of Japan, which was once the largest buyer of government bonds, is now reducing its bond purchases. The combination of rising supply and contracting demand has directly shaken the stability of the bond market. Investors can only hedge risks by selling bonds and demanding higher yields, which has also become the direct driver of the sharp rise in yields.

The deeper problem lies in the self-contradiction of the policy logic itself. Japan's core CPI has been rising for over 50 consecutive months, and inflation is no longer a temporary phenomenon. According to conventional economic logic, at this point, both monetary and fiscal tightening should be carried out simultaneously to cool down aggregate demand. However, the reality is that the central bank is forced to raise interest rates to curb inflation and stabilize the yen, while the government continues to flood the economy with liquidity through subsidies and stimulus. The government attributed inflation mainly to "imported factors" in an attempt to defend its expansionary fiscal policy. However, after the international commodity prices dropped, domestic inflation in Japan remained stubborn, and this explanation seemed increasingly pale.

The wavering of market confidence is translating into real and heavy costs. For the Japanese government, every rise in government bond yields rapidly amplifies into a huge interest burden. With a debt scale of over a trillion yen, even a limited increase in interest rates could lead to trillions of yen in new interest expenses, further squeezing fiscal space and making fiscal resources more used for debt repayment rather than productivity improvement. Meanwhile, banks, insurance companies and pension institutions have long held large amounts of government bonds. A decline in bond prices will erode their balance sheets. Once the accumulated pressure is released, it may even evolve into systemic financial risks.

For the real economy, the rise in long-term interest rates means that the costs of corporate investment and residential mortgages and consumer credit are increasing simultaneously. In an environment where real income growth is sluggish and consumer confidence is already fragile, such tightening of financial conditions is likely to suppress investment and consumption and weaken the endogenous driving force for economic recovery. More symbolically, the long-standing status of the Japanese yen as a "safe-haven asset" is being shaken. Once international investors lose patience with Japan's fiscal discipline, the sentiment of "selling off Japan" may spread from the bond market to a wider range of asset sectors.

Overall, the real way out does not lie in continuing to overdraw the debt space, but in advancing the difficult yet unavoidable structural reforms, including addressing the issue of low birth rates and an aging population, enhancing industrial competitiveness, improving productivity and rebuilding fiscal discipline. However, in reality, short-term political considerations often outweigh long-term economic rationality. The "century-long" rise in government bond yields is a cruel mirror, reflecting the inherent contradiction of fiscal gamble and monetary tightening running in parallel. It clearly indicates that the old model of relying on unlimited debt and policy hedging to maintain stability is losing its effectiveness, and the time left for Japan to truly confront structural reforms is running out.