Although the Bank of Japan's monetary policy tightening will put upward pressure on both government interest payments and fiscal deficits, the impact on Japan's debt dynamics and ability to finance higher defense spending will remain manageable, as long as the central bank does not engage in large-scale sales of government bonds. The Bank of Japan will hold a monetary policy meeting on June 15-16, and financial markets are pricing in an 80% probability of a 25-basis-point rate increase following strong first-quarter annualized GDP growth of 2.1%. In the context of post-pandemic recovery and stronger wage growth, Japan's inflation consistently exceeded the central bank's 2% target every month from April 2022 through December 2025. The Bank of Japan initially responded by making the yield cap more flexible in late 2022, before abolishing the cap and ending its negative interest rate policy in March 2024. The bank has since gradually raised its...
