The Bank of Japan is widely expected to raise interest rates this week, marking its first increase since January and taking borrowing costs to their highest level in 30 years, a move that risks adding to volatility in Japan’s government bond market.

According to AFP, most economists anticipate the central bank will lift its benchmark rate from 0.5% to 0.75%, a level last seen in the mid-1990s. Such a step would underline the BoJ’s gradual retreat from decades of ultra-loose monetary policy, even as other major central banks, notably the US Federal Reserve, move towards easing.

Japanese government bond yields have climbed sharply in recent weeks amid growing investor unease over the fiscal stance of Prime Minister Sanae Takaichi’s administration. Concerns over expanding public borrowing have pushed yields higher, while the yen has come under renewed pressure, AFP adds. Higher domestic interest rates tend to make Japanese bonds more attractive relative to overseas assets, depressing prices and lifting yields.

The policy shift comes despite signs of economic fragility. Japan’s economy contracted by 0.6% in the third quarter, although central bank officials have indicated that the impact of US trade measures has so far been limited. Inflation, by contrast, has remained above the BoJ’s 2% target, with core consumer prices rising by 3.0% in October.

Market anxiety has also been fuelled by the government’s latest stimulus plans. Japanese lawmakers have approved an additional budget worth JPY18.3 trillion to support households, much of it funded through new debt. But with public debt already the highest among advanced economies, investors have pushed long-dated bond yields to record levels, highlighting the delicate balance facing policymakers as they tighten monetary policy against a backdrop of fiscal strain.