―― An Economist’s Perspective with a BOJ Rate Hike Scenario ――
Wrote By:Global Economist 2025/10
1. Introduction
In the autumn of 2025, the risk of a prolonged U.S. government shutdown has increased significantly. Such an event would not only disrupt the U.S. economy but also spill over into the global financial system, exerting multifaceted effects on Japan. This report examines the potential transmission channels of a prolonged U.S. government shutdown on Japan’s economy, while integrating the scenario of additional rate hikes by the Bank of Japan (BOJ).
2. Direct and Indirect Impacts of a Prolonged Shutdown
(1) Financial Market Channels
- USD/JPY Exchange Rate:
Concerns over U.S. fiscal credibility → Dollar depreciation and yen appreciation. A stronger yen undermines Japanese exporters’ earnings. - U.S. Treasury Market:
Auction disruptions → Higher U.S. Treasury yields → Rising global financing costs.
Japanese banks and insurers with large U.S. bond holdings face valuation losses.
(2) Real Economy Channels
- Export Slowdown:
Weakening U.S. consumption and investment → Decline in demand for Japanese autos, semiconductors, and industrial machinery. - Supply Chain Disruptions:
Customs and port clearance delays in the U.S. → Logistics bottlenecks affecting Japanese companies’ delivery schedules.
(3) Policy and Diplomatic Channels
- Economic Cooperation:
Approval of bilateral projects in semiconductors and energy could be delayed. - Defense and Security:
U.S. budget paralysis could slow down joint defense initiatives with Japan.
3. BOJ Rate Hike Scenario and Interaction Effects
(1) Drivers of BOJ Tightening
- Wage hikes and persistent service price increases are prompting the BOJ to normalize policy gradually.
- BOJ officials have hinted at the possibility of further hikes by early 2026.
(2) Combined Effect with U.S. Shutdown Risk
- Amplified Yen Appreciation:
Dollar weakness due to shutdown risk + narrowing U.S.-Japan rate differential due to BOJ hikes → Yen surges.
→ Adverse impact on exporters’ earnings and equity market correction. - Bond Market Stress:
Rising U.S. yields + BOJ hikes → Higher JGB yields → Greater fiscal burden for Japan. - Household Impact:
Mortgage rates climb, weighing on consumption.
However, higher deposit rates could slightly improve spending power among retirees.
4. Scenario Analysis for Japan
Scenario A: Short Shutdown (within 1 month) + BOJ stays on hold
- Temporary market volatility.
- Limited impact on exports and corporate activity.
- BOJ adopts a “wait-and-see” stance, tolerating exchange rate fluctuations.
Scenario B: Medium Shutdown (3+ months) + BOJ hikes 0.25%
- Japan’s GDP contribution from exports falls by ▲0.3 to ▲0.5 percentage points.
- Yen strengthens into the ¥130s per dollar, squeezing corporate profits.
- Export-oriented stocks sell off, while domestic demand and financials outperform.
Scenario C: Prolonged Shutdown (6+ months) + BOJ hikes 0.5%+
- Global risk aversion triggered by U.S. fiscal crisis concerns.
- Yen surges into the ¥120s per dollar, inflicting severe damage on export-driven growth.
- Rising JGB yields increase Japan’s fiscal burden, reigniting debates over fiscal discipline.
5. Policy Implications
(1) Government and BOJ
- Maintain readiness for FX intervention while carefully timing any additional rate hikes.
- Deploy supplementary budgets to support companies and cushion household demand.
(2) Corporations
- Exporters: Strengthen currency hedging and reassess dollar-denominated procurement.
- Financial institutions: Diversify away from concentrated U.S. bond exposures and strengthen risk management.
- Domestic-oriented firms: Refine price pass-through strategies to cope with rate-driven demand shifts.
(3) Investors
- Yen appreciation presents an opportunity to increase U.S. dollar assets.
- In equities, relative attractiveness shifts to domestic demand and financial sectors.
- Bond investors must guard against rising risk premiums in global credit markets.
6. Conclusion
A prolonged U.S. government shutdown poses triple risks for Japan: yen appreciation, export slowdown, and financial market instability. If compounded by BOJ rate hikes, these risks intensify, threatening corporate earnings, fiscal stability, and household consumption.
Japan’s policymakers must therefore prepare for a “dual-shock scenario” by reinforcing currency stabilization tools, fiscal backstops, and international policy coordination.
