This Week's Weekly: The ¥21 Trillion-Plus Economic Stimulus Package is the Fuse for a Weak Yen, Inflation, and a Bubble Explosion

 This Week's Weekly: The ¥21 Trillion-Plus Economic Stimulus Package is the Fuse for a Weak Yen, Inflation, and a Bubble Explosion—The Double Whammy of a 10% Consumption Tax and an Accelerating Inflation Tax Will Only Further Exploit the Common People

 

Monday, November 24, 2025

 

① Will the ¥21 Trillion-Plus Economic Stimulus Package Be Enough to Alleviate Concerns about Living?

 

The Mainichi Shimbun's editorial on Saturday, November 22nd, was quite persuasive, stating, "Simply inflating the budget unchecked will not alleviate the concerns of the people suffering from rising prices." Below, we borrow an excerpt from the editorial to highlight the dangers of Sanaenomics, which proposes a supplementary budget exceeding ¥21 trillion.

 

The Takaichi Sanae administration has decided on its first economic stimulus package since taking office. It emphasizes "active fiscal policy" and totals over ¥21 trillion, more than ¥6 trillion more than last fall's package. This means the administration is planning a massive fiscal stimulus policy amounting to 3.5% of nominal GDP of approximately 600 trillion yen.

 

If we assume that the fiscal policy multiplier coefficient is the usual 1.5, the aggregate demand stimulus effect would be just over 32 trillion yen, 1.5 times the 21 trillion yen. The aggregate demand stimulus effect relative to GDP would be amplified by 5.3%.

 

In contrast, according to the government and the Bank of Japan, the potential growth rate of the Japanese economy is only about 0.6%. Therefore, excessive aggregate demand stimulation by fiscal stimulus could trigger inflation of as much as 4.7%, corresponding to this gap. In fact, as detailed in Section 3, the October national CPI already suggests that inflation could reach 5% in the near future.

 

In this way, far from addressing rising prices, Sanaenomics is playing with fire, adding fuel to the fire of accelerating inflation and potentially turning the Japanese economy into a scorched earth.

 

Specifically, the government's top priority measures to combat rising prices can hardly be described as handouts. In addition to abolishing the temporary gasoline tax, subsidies for winter electricity and gas bills will be significantly increased starting this summer.

 

Low-income earners are the ones hit hardest by rising prices. Support should be prioritized for these groups. However, if support is given generously to high-income earners as well, it is obvious that this could overly stimulate consumption and contribute to price hikes.

 

Furthermore, the distribution of "rice coupons" that allow people to buy rice cheaper cannot be overlooked. While large grants will be provided to a wide range of local governments as financial resources, this reduction in the burden on consumers is only temporary. The fundamental problem of a weakening production base is being covered up, and prices will remain high.

 

Adopting the Komeito Party's proposal to add 20,000 yen to child allowances across the board is also spurring inflation. While the government's minority government likely aims to gain cooperation in passing the budget, it would be irresponsible to swallow it whole without considering financial resources.

 

The effectiveness of large-scale investments in areas deemed essential is also being questioned. The prime minister claims to increase growth potential to realize a "strong economy," raising wages and increasing tax revenue. However, investments are prominently focused on industries that have been left behind in international competition, such as semiconductors and shipbuilding.

 

In the end, large-scale measures will not be covered by tax revenue, and a large amount of additional government bonds will have to be issued. Concerns about a worsening fiscal situation are growing in financial markets, accelerating yen selling.

 

The weak yen has been a major factor in the rise in prices since April 2022. While raising interest rates by the Bank of Japan would lead to a correction, the prime minister has maintained a cautious stance. A further decline in the yen could lead to further price increases.

 

Government bonds are also being sold in the market, and long-term interest rates have risen to their highest level in 17 and a half years. Not only will interest payments on the debt mount, passing the burden on to future generations, but the sudden fall in government bond prices will also raise concerns about the finances of regional banks and other financial institutions holding large amounts of long-term government bonds, as unrealized losses grow.

 

The Prime Minister has emphasized that he will "turn anxiety about the future into hope." However, prioritizing short-term popularity will only leave a lasting legacy of serious problems.

 

② Japan's Debt Denial: Japan's Long-Term Interest Rates are Showing Debt Crisis Signs

In this section, we introduce a very interesting tweet dated November 23rd by Robin J. Brooks (a senior fellow at the Brookings Institution and former FX analyst at Goldman Sachs):

"Japan is in denial. For years, despite its massive government debt, long-term interest rates have been very low, creating the illusion that this was somehow normal. This is not the case. Low interest rates are artificial, brought about by the Bank of Japan's (BOJ) massive purchases of government bonds and the imposition of yield caps. This approach ran into problems after the COVID-19 pandemic. As central banks raised interest rates to contain inflation, long-term government bond yields began to rise globally. The BOJ continued to cap long-term interest rates, but this was due to the weak yen. It spiraled. The yield cap was no longer sustainable.

"What you need to know about Japan's long-term interest rates is that, even after their recent rise, they remain artificially low. After all, as we've noted in this article, the Bank of Japan (BoJ) remains a large buyer of Japanese government bonds on a gross basis. Imagine how high Japanese yields would be if the BoJ truly withdrew from the market. Japan's "shadow" long-term yields—the yields that would equilibrate the market in the absence of BoJ bond purchases—are much higher than we're seeing. "

"The easiest way to see how deeply skewed Japan's long-term yields are is with the graph below. The horizontal axis shows total debt as a percentage of GDP. The vertical axis shows 30-year government bond yields. Eurozone countries are in red, other G10 countries are in blue, and Germany (DE) and Japan (JP) are in black. Germany's debt in 2024 was 65% of GDP, Japan's was 240%. Yet the yields on their 30-year government bonds are the same. This is a sign of major mispricing, showing that Japanese government bond yields are far below where they should be.

"Japan has options. The alternative is to let the market set yields without BOJ intervention, which would stabilize the yen but lead to a significant rise in long-term interest rates and a debt crisis. Or to cap yields, which would keep the yen falling. Sanae Takaichi hopes this will differentiate her from her predecessor, but expanding debt-fueled stimulus will only make things worse and demonstrate that the highest levels of government do not understand how precarious Japan's debt situation is. It is easier to remain trapped in the deception than to acknowledge the unpleasant reality.

 

③ October's national CPI growth rate accelerated to +4.9% year-on-year, driven by a sharply weaker yen.

 

The Ministry of Internal Affairs and Communications announced the October national consumer price index (core CPI excluding fresh food) on Friday, November 21st. The year-on-year growth rate expanded for the second consecutive month, reaching the 3% mark for the first time in three months. Core CPI rose 3.0% year-on-year, up from a 2.9% increase in September. This marks the 43rd consecutive month that the CPI has exceeded the Bank of Japan's target of 2%.

 

Food prices excluding fresh food remained strong, rising 7.2%, while rice prices rose 40.2%. Energy prices rose 2.1%. It's unfortunate that, like the Nikkei article and others, the Bloomberg article only focuses on the year-on-year inflation rate, pointing out that factors such as auto insurance premiums (up 6.9%) and hotel rates (up 8.5%) were driving the increase.

 

This is because Western media typically analyzes time series data trends not only in year-on-year comparisons, but also in seasonally adjusted month-on-month comparisons. The former can result in a delay in recognizing changes in economic indicators such as inflation over a six-month period compared to the latter.

 

Looking at month-on-month comparisons, it is noteworthy that the national CPI for October was +0.4% (+4.9% annualized) on an overall, core, and core-core basis, indicating a significant acceleration of inflation.

 

This coincides with the October PPI's +0.4% month-on-month change, and it is clear that behind this is the significant month-on-month decline in the dollar-yen exchange rate. The dollar-yen exchange rate went from around 148 yen at the end of September to around 154 yen at the end of October, a significant monthly depreciation of the yen and appreciation of the dollar of -4.1%.

 

At its October meeting where it decided to maintain the current monetary policy, the Bank of Japan emphasized that there would be disinflation (a decline in the rate of price increase) in the future. However, rice prices rose significantly in October, by 5.3% compared to the previous month (annualized increase of 85.8% compared to the previous month), and recorded a 40.2% increase compared to the same month last year.

 

④ The Significance of Q3 GDP, the First Real Negative Growth in Six Quarters

 

Now, the Cabinet Office released the preliminary GDP figures for the July-September 2025 quarter on Monday, November 17. While this represents the first quarter-on-quarter negative growth in six quarters, it is not a second consecutive quarter of negative growth and does not technically qualify as a recession.

 

Both personal consumption and corporate capital investment maintained positive growth compared to the previous quarter, indicating that the Japanese economy is not entering a structural contraction. Furthermore, there is a possibility that corporate capital investment and other forecasts may be revised upward in the upcoming second revision.

 

In any case, this was a temporary negative growth resulting from a combination of special factors, including a rebound decline in housing investment. Rather, we must not lose sight of the fundamental challenges facing the Japanese economy: the vicious cycle of currency depreciation and inflation.

 

In fact, the GDP deflator rose 0.6% quarter-on-quarter and 2.8% year-on-year, indicating that inflation continues to exceed 2% not only on a CPI basis but also on a value-added basis. This is not a temporary phenomenon, but a sign of structural upward pressure on prices.

 

To overcome the quadruple challenges facing the Japanese economy -- a declining birthrate, long-term stagnant consumption, a depreciating currency, and high prices -- an appropriate monetary and fiscal policy mix centered on the normalization of monetary policy and the abolition of the consumption tax is essential.

 

The current negative GDP growth is only a temporary phenomenon, but this situation should be seen as an opportunity to reaffirm Japan's path to recovery.

 

⑤ A New Cold War Between Japan and China Could Be the Final Blow to the Quadruple-Worse Japanese Economy

 

This morning's Asahi Shimbun editorial, "Japan-China Relations: Putting an End to the Fruitless Conflict," dated Tuesday, November 18th, was persuasive overall. However, it also contains some issues that cannot be overlooked.

 

This is because we must not overlook the fact that one of the causes of the fruitless conflict in Japan-China relations is Japan's own words and actions. The first step toward truly restoring trust is to frankly admit our fault and demonstrate a willingness to exercise self-control.

 

Simply seeking improvement in China's overreactions and hardline stance, which Japan cannot directly control, risks making the situation worse. Diplomacy should involve assessing the other party's actions while calmly adjusting one's own position.

 

In any case, the editorial is noteworthy, especially as it documents the rapidly escalating issues between Japan and China. Below are its key points.

 

Immediately after Prime Minister Takaichi shook hands with Chinese President Xi Jinping in late October and agreed to "build a constructive and stable relationship," Japan-China relations rapidly deteriorated.

 

The trigger was a comment made by Prime Minister Takaichi in a Diet response on November 7. Regarding China's response to a Taiwan emergency, she said, "If it involved the use of military force using battleships, it could pose an existential threat."

 

This comment goes beyond the views of previous administrations, including the Abe administration that enacted the security legislation. Moreover, by mentioning the name "Taiwan," it must be said that it unnecessarily escalated tensions.

 

The Chinese government has firmly maintained its position that "Taiwan is an inalienable part of China," and the Japanese government has pledged to respect this. Previously, Japan has limited its statement to the "importance of peace and stability in the Taiwan Strait," but these recent comments go beyond that.

 

China reacted strongly, summoning its ambassador to China to protest. Furthermore, it is difficult to understand the government's attempts to spread the conflict between governments to the private sector, such as by calling for people to refrain from traveling and studying abroad.

 

In addition, the abusive social media posts by Xue Jian, China's Consul General in Osaka -- "We will have no choice but to cut off that filthy head without a moment's hesitation" -- are completely unacceptable for a diplomat. Although the posts have been deleted, no explanation has been offered and the Chinese Ministry of Foreign Affairs has defended them, which is unacceptable.

 

It is only natural that the Japanese government protested against such provocative behavior. However, what is important here is for our country to maintain calm and restraint and avoid escalating the situation. In light of Xue's past behavior and remarks, there are calls for him to "exit the country," but hasty action could be counterproductive.

 

Japan-China relations can only be stabilized through mutual trust and moderate dialogue. Japan itself must first be deeply aware of the weight of its words and the historical context, and maintain a cautious diplomatic stance.

 

China's responses so far have been limited to (1) a de facto ban on imports of Japanese seafood, (2) calls for people to refrain from travel to Japan, (3) postponements of Japanese film releases and cancellations of events, and (4) the postponement of ministerial meetings at the request of China.

 

However, depending on Japan's future response, we cannot rule out the possibility that China may resort to its trump card, such as restricting or banning rare earth exports to Japan.

 

In any event, any further escalation of the Sino-Japanese cold war could have a fatally negative impact on the Japanese economy.

 

⑥ The Mystery of Japanese Stocks' Much-Hated Ups and Downs Over NVIDIA's Earnings

By the way, the wild fluctuations in the Nikkei Stock Average last week surrounding NVIDIA's earnings results, which could be described as "much-hated ups and downs," are thought to be primarily due to a combination of the following factors.

1. Background to the Rise (Excitement and Relief Over NVIDIA's Strong Earnings)

• NVIDIA's "Super" Strong Earnings

o At the start of the week (November 20th), NVIDIA's quarterly earnings, announced the previous day (November 19th, US time), showed record profits that far exceeded market expectations and provided a bullish earnings outlook.

o NVIDIA is the largest semiconductor (GPU) manufacturer driving the AI ​​boom, and its earnings results were closely watched worldwide as a test of the sustainability of the "AI boom."

• Impact on Semiconductor-Related Stocks in the Japanese Market

• Huge buying activity was concentrated in Japanese semiconductor-related stocks (such as Tokyo Electron, Advantest, and SoftBank Group, which are high-value stocks that contribute significantly to the Nikkei 225 index) where NVIDIA has many customers and suppliers, due to expectations of continued demand for AI.

• As a result, the Nikkei 225 index soared by more than 2,000 yen at one point, recovering to the 50,000 yen range. This likely included buybacks by investors who had reduced their positions due to excessive caution prior to the earnings announcement.

• 2. Background to the Sharp Drop (Lumbersome Reaction in the US Market and Rekindled Overheating)

• Sluggish Growth of NVIDIA Stock in the US Market

• Immediately after the earnings announcement, NVIDIA shares rose sharply in after-hours trading, but once full-scale US market trading began, their shares stagnated and ultimately closed in the red.

Because the market's strong earnings results had already priced in high expectations, the market viewed the news as "all the news has been released," and the "bubble-like overheating of the AI ​​boom" persisted.

 

• Renewed recognition of overheating in the Japanese market and profit-taking

• The decline in NVIDIA shares in the U.S. market eroded the sense of relief that the "AI boom is not over," and in turn rekindled concerns about overheating in Japanese semiconductor-related stocks.

• Because it came immediately after a surge, short-term profit-taking sales dominated, leading to a sharp drop of over 1,000 yen the following day (November 21).

• Other external factors (correction trend)

• The Nikkei average had already entered a correction phase since the beginning of the week due to concerns about prolonged U.S. monetary tightening, falling U.S. stock prices, and concerns over certain political and economic developments. The event occurred amid a weak market sentiment. While NVIDIA's earnings results temporarily offset this trend, subsequent developments accelerated the correction trend once again.

 

This series of movements shows that the "AI boom" is the most important theme in the stock market today, and that the financial results of NVIDIA, its core company, have an extremely large influence on Japan's major tech stocks and, by extension, the Nikkei Stock Average.

• Skyrocket: The enthusiasm was caused by the market's biggest concern (the end of the AI ​​boom) being temporarily alleviated by NVIDIA's extremely strong financial results.

• Sharp drop: The subsequent reaction of the US market led people to conclude that "stock prices are not growing despite good financial results = the sense of overheating is still strong," and short-term investors concentrated their selling efforts to take profits and avoid risk.

 

In short, amid a tug-of-war between "expectations" and "caution over overheating" regarding the huge theme of the AI ​​boom, stocks that contribute significantly to the Nikkei Stock Average reacted strongly to this, resulting in extreme price movements.

 

7. US Employment Growth Exceeds Expectations, Unemployment Rate Rise to 4.4% - Reflecting Labor Market Instability

 

To conclude this week's weekly report, let's take a look at the latest US economic indicators, as the government shutdown has finally been lifted and the publication of US economic indicators has finally begun to partially resume.

 

In the September US employment report, nonfarm payrolls increased by 119,000, beating market expectations. However, August's figure was revised downward to a decrease. The unemployment rate also rose 0.1 percentage point from the previous month to 4.4%, reaching its highest level in nearly four years.

 

By industry, healthcare and leisure/hospitality saw notable employment growth. Meanwhile, manufacturing, transportation/warehousing, and business services saw declines. Private sector employment increased by 97,000, the largest increase in five months and exceeding market expectations.

 

Notably, the labor force participation rate reached 62.4%, the highest level in four months. Women contributed to the increase. The "prime working generation" (ages 25-54) maintained its highest level in a year.

 

Average hourly earnings increased 0.2% from the previous month (compared to market expectations of a 0.3%), the slowest growth since June. Compared to the same month last year, they were up 3.8% (compared to 3.7%).

 

In the end, the September employment statistics may be seen as providing some reassurance that the US labor market was not in a state of collapse before the government shutdown.

 

By the way, the US Bureau of Labor Statistics announced on the 19th that it will not release October employment statistics. The October employment data will be incorporated into the November data, scheduled for release on December 16th.

 

Since the next FOMC meeting is on December 9th and 10th, this September's employment statistics will be the last to be released before the FOMC meeting. The release of the October CPI has also been canceled, with the November data scheduled for release on the 18th, after the December FOMC meeting.

 

Finally, as I pointed out at the beginning, it is truly unfortunate that Sanaenomics and Ueda's Bank of Japan appear to be heading in the exact opposite direction from the traditional path of economics, almost as if they are "crazy."

If things continue like this, I worry about what will happen to Japan as we approach the New Year holidays. A crash, dissolution of the Diet, or a general election is not out of the question.

In any case, let's overcome this greatest challenge since the war.

I believe that crisis is also a great opportunity.

 

Ｔomo Nakamaru, Former World Bank Economist