Core Viewpoint - Japan's combination of expansive fiscal policy and tight monetary policy may lead to risks of a reversal in carry trades, necessitating vigilance regarding the Bank of Japan's hawkish stance and the Federal Reserve's dovish periods [1] Group 1: Economic Stimulus Plan - The Japanese government has introduced an economic stimulus plan totaling 21.3 trillion yen (approximately 135 billion USD), slightly above market expectations but lower than 2022 levels [1] - The stimulus plan focuses on three main areas: 11.7 trillion yen (55%) for inflation subsidies and livelihood support, 7.2 trillion yen (34%) for strategic industry investments, and 1.7 trillion yen (8%) for defense and diplomacy [4] - The fiscal stimulus may increase Japan's deficit ratio to 3% by 2026, with Japan's deficit expected to expand by 1.77 percentage points, compared to 1 percentage point for the U.S. and 0.84 percentage points for Germany [4] Group 2: Impact on GDP and Inflation - The fiscal stimulus is projected to boost Japan's GDP growth rate by 0.5 percentage points in 2026, although the impact is expected to be lower than that of the U.S. and Germany [5] - Japan's fiscal multiplier is low at 0.27, compared to an average of 0.8 for developed economies, which contributes to the lower effectiveness of the stimulus [5] - The stimulus may temporarily lower overall inflation but could increase core inflation pressures due to rising demand [6][7] Group 3: Monetary Policy and Carry Trade Risks - The combination of fiscal expansion and cautious monetary tightening may increase the risk of a reversal in carry trades, as the narrowing U.S.-Japan interest rate differential diminishes the profitability of such trades [10][11] - The 2-year U.S.-Japan interest rate differential has decreased from 3.7% at the beginning of the year to 2.5%, heightening the risk of carry trade reversals [11] - The potential for increased volatility in the currency and bond markets may trigger risks of carry trade unwinding, particularly during periods of policy mismatch between the Bank of Japan and the Federal Reserve [11]

Group 1: Economic Stimulus in Japan - The economic stimulus plan introduced by Prime Minister Kishi is valued at 21.3 trillion yen (approximately 135 billion USD), exceeding market expectations of 17 trillion yen[2] - The plan allocates 55% (11.7 trillion yen) for inflation subsidies and social welfare, 34% (7.2 trillion yen) for strategic industry investments, and 8% (1.7 trillion yen) for defense and diplomacy[3] - Japan's fiscal deficit rate is projected to rise significantly to 2.8% in 2026, with an increase of 1.77 percentage points, compared to 1.0% for the US and 0.84% for Germany[18] Group 2: Economic Growth and Inflation - The fiscal stimulus is expected to boost Japan's GDP growth by 0.5 percentage points in 2026, which is lower than the contributions expected from the US (0.6 points) and Germany (0.63 points)[23] - Temporary inflation subsidies may reduce the overall CPI growth by 0.7 percentage points in early 2026, but could increase core inflation pressures in the medium term[27] - The combination of loose fiscal policy and tight monetary policy may lead to a reversal of carry trade, with the USD/JPY exchange rate reaching a low of 157.9 recently[4] Group 3: Market Reactions and Asset Performance - In the week following the announcement, major equity indices rose, with the S&P 500 increasing by 3.7% and the Nasdaq by 4.9%[5] - The US dollar index fell by 0.7% to 99.44, while gold prices surged by 3.4% to 4223.9 USD per ounce[5] - The 10-year US Treasury yield decreased by 4.0 basis points to 4.02%, indicating a shift in investor sentiment following the economic developments[5]