On February 10, Japanese and South Korean stock markets opened higher once again. By 9:30, Japan's Nikkei 225 index had expanded its gains to over 2%, setting a new historical record, with SoftBank Group soaring more than 10%.
South Korea's KOSPI index rose 0.71%, with heavyweight Hyundai Motor climbing over 2%.
Following the announcement of Japan's House of Representatives election results, the yen and Japanese government bonds (JGBs) came under renewed pressure. According to a February 9 report, the ruling coalition composed of the Liberal Democratic Party and Japan Innovation Party secured a majority of seats in the election held on February 8. Market analysts suggest this outcome reduces obstacles for the Japanese government in advancing its economic agenda.
Impacted by the election results, both the yen and JGBs faced selling pressure on February 9. At the time of reporting, the yen traded at 155.9 against the US dollar, having fluctuated recently but remaining generally weak. JGBs experienced significant selling: the yield on 5-year JGBs rose to 1.725%, the highest level since records began in 2001; the 10-year yield increased by 3.24% to 2.296%; and the 20-year yield climbed 1.31% to 3.176%. By the latest update, some yields had retreated slightly, with the 5-year yield declining 3.0 basis points to 1.710% and the 10-year yield falling to 2.256%.
An expert analysis indicates that the simultaneous decline in the yen, rise in Japanese stocks, and sell-off in JGBs were widely anticipated by the market. This trend is primarily attributed to increased expectations for expansive fiscal policies and delayed interest rate hikes following the ruling coalition's victory.
The analyst explained that the government advocates stimulating the economy through large-scale fiscal expansion and tax reductions, which would require increased government bond issuance. Higher supply leads to lower bond prices and rising yields, creating selling pressure. Additionally, as the government has expressed caution regarding premature rate hikes, markets expect monetary conditions to remain accommodative, contributing to yen weakness due to interest rate differentials. A weaker yen benefits export-oriented companies' earnings, and reduced political uncertainty has collectively boosted Japanese equities. This market behavior suggests that political stability and stimulus measures are viewed as short-term positives, though concerns about Japan's long-term fiscal sustainability persist.
A global sell-off of JGBs and the yen has been underway since last November. Another expert noted that following the ruling party's election victory, market worries about Japan's fiscal health and the potential strain on its financial system have intensified.
The Japanese government shows no intention of slowing its economic stimulus efforts. A December report highlighted that the cabinet's supplementary budget for the 2025 fiscal year, approved by the Diet, expanded by over 30% compared to the previous year's supplementary budget. It was described as the largest post-pandemic supplementary budget, aimed at addressing rising prices and promoting growth.
Repeated rounds of fiscal stimulus have led to a snowballing increase in Japan's debt. A January 22 report from the Cabinet Office projected a primary balance deficit of approximately 800 billion yen (about $5.1 billion), or 0.1% of GDP, for the new fiscal year starting in April, excluding public debt servicing costs. While this represents the smallest deficit since the fiscal target was established in 2001, it contrasts with a government forecast from August last year that anticipated a surplus of 3.6 trillion yen for the same period.
Regarding the sustainability of the sell-off in the yen and JGBs, the first expert believes that pressure to sell JGBs is unlikely to ease in the short term due to upward pressure on long-term interest rates. Overall, the Japanese market is experiencing a volatile transition from deflationary to inflationary pricing.
A market strategist from a global financial technology firm stated that the ruling party's policies are contributing to further yen weakness. Loose fiscal policy does little to alleviate concerns about debt sustainability and fails to boost confidence in the yen. Should the yen weaken to 160 against the dollar, Japanese authorities might intervene directly in foreign exchange markets to support the currency.
The chief investment strategist from Standard Chartered's wealth management division in China also suggested the yen is expected to remain weak until effective government intervention occurs. Under aggressive fiscal policies, JGBs face a lack of buyers, creating an imbalance between supply and demand. This dynamic could push yields even higher, compounded by fiscal risks.
With the election results known, markets are broadly betting on the government maintaining ultra-loose fiscal policies. Some experts view the long-term economic stimulus plan as a double-edged sword. The first expert warned that large-scale fiscal expansion without alternative funding sources could worsen Japan's already heavy debt burden and undermine the creditworthiness of JGBs. If stimulus fails to effectively enhance productivity, it could trigger a sharp, disorderly decline in the yen, potentially leading to a scenario where stocks, bonds, and the currency all suffer significantly. The ruling party's victory essentially commits Japan to a risky path of seeking growth through higher debt and higher inflation.
The persistent weakness of the yen is already influencing expectations for the Bank of Japan's (BOJ) policy direction. Overnight index swaps indicate increasing probability of a BOJ rate hike in April. However, the decision is complicated by Japan's economic contraction, persistent inflationary pressures, and consecutive declines in real wages.
Data shows Japan's real GDP shrank at an annualized rate of 1.8% in the third quarter, marking a return to negative growth since Q1 2024, with a quarterly decline of 0.4%. Meanwhile, inflation remains elevated. As of December, the core Consumer Price Index (CPI), excluding fresh food, rose 3.0% year-on-year to 112.5, increasing for the 51st consecutive month. Concurrently, data released on February 9 showed that Japan's average real wages fell 1.3% in 2025 compared to the previous year after adjusting for inflation, declining for the fourth consecutive year.
The first expert described Japan's situation as a structural dilemma characterized by imported inflation coupled with weak domestic demand. Although nominal GDP is boosted by rising prices, the negative GDP growth in the last quarter reflects a contraction in real economic activity after adjusting for inflation.
He further pointed out that the core reason for the economic contraction is that wage growth has not kept pace with price increases. Yen depreciation has raised the cost of imported energy and food, eroding household purchasing power and leading to four consecutive years of declining real wages. This trend constrains personal consumption, which accounts for over half of Japan's GDP. Additionally, while corporate profits have grown, investment willingness is limited by an aging population and labor shortages.
Another expert remarked that after emerging from long-term deflation, the Japanese economy faces a severe test in transitioning to a new economic cycle.
Although external observers see an increased likelihood of a BOJ rate hike in April, Japan's weak economic performance undoubtedly complicates the central bank's decision-making. The first expert noted the BOJ's dilemma: on one hand, GDP contraction and negative wage growth call for maintaining low rates to stimulate the economy; on the other hand, inflationary pressures from the持续 yen depreciation necessitate action.
The key to a potential April rate hike lies in the outcome of the spring wage negotiations. The expert believes that if wage increases maintain the momentum seen last year, the BOJ could confidently assert that a virtuous cycle of wages and prices is forming, paving the way for interest rate normalization. Therefore, April is not only a critical policy window but also a major test of the BOJ's ability to balance economic growth and exchange rate stability.