Japan is brewing a major shift in its economic policy, with multiple signals emerging simultaneously. What strategic considerations are hidden behind these developments?

The fiscal situation has shown signs of a turnaround. Japanese Prime Minister Fumio Kishida announced that a primary fiscal surplus of 1.34 trillion yen is expected in the 2026 fiscal year, marking the first such surplus in nearly 28 years. Meanwhile, the cabinet approved an annual budget of 122.3 trillion yen, seeking a balance between stimulating economic growth and maintaining fiscal discipline, aiming to ease long-term concerns in international markets over Japan’s debt issues.

The shift in monetary policy is even more evident. Data shows that Japan’s average monetary base balance in 2025 decreased by 4.9% year-on-year, marking the first negative growth in 18 years; in December, the monetary base even fell below 600 trillion yen. This reflects the central bank’s gradual tightening of large-scale liquidity support, with reductions in bond purchases and interest rate adjustments, potentially leading to further declines in the monetary base.

The financial markets have responded with a chain reaction. The Japanese stock market performed strongly, with the Tokyo Stock Exchange and Nikkei 225 indices rising nearly 4% over two days; foreign investment continued to buy in, marking a rare strong start in decades. On the other hand, the 10-year government bond yield rose to 2.130%, reaching a new high since 1999, indicating that investor expectations for the economic outlook are adjusting.

Most notably, policy changes in the cryptocurrency sector are drawing attention. Japan’s Financial Services Agency plans to upgrade the crypto asset regulatory department to an independent “section” level by July 2026, which will significantly strengthen regulatory oversight. More importantly, in the 2026 tax reform, cryptocurrencies are explicitly classified as “financial products that contribute to the formation of national assets.” This definition brings two key adjustments: trading gains from spot, derivatives, and ETFs may enjoy lower separate taxation, and losses can be carried forward for up to three years for deduction.

The synchronized advancement of these policies warrants deep reflection. Against the backdrop of the central bank gradually tightening and fiscal efforts aiming for surpluses, Japan is simultaneously adopting a more crypto-friendly stance at the institutional level. An analysis by ING suggests that the central bank’s rate hikes may be quite moderate, while expansionary fiscal support could pose economic risks in 2026. So the question is: Is Japan demonstrating economic health through fiscal discipline while opening new financing and innovation channels through institutionalized crypto assets? This subtle adjustment in the economic structure may be laying the groundwork for the next phase of growth.