Japan’s government has sought to reassure investors that it remains committed to fiscal discipline and respects the independence of the Bank of Japan (BOJ) after markets reacted sharply to a draft economic policy blueprint that fueled concerns over increased government spending and prolonged low interest rates.

Reuters reports that the clarification came after benchmark Japanese government bond yields climbed to their highest levels in three decades, reflecting growing unease over the fiscal direction of Prime Minister Sanae Takaichi’s administration and its potential implications for monetary policy.

The yield on the benchmark 10-year Japanese government bond (JGB) rose to 2.83% on Monday, its highest level since the mid-1990s, as investors worried that the government’s revised fiscal strategy could lead to higher borrowing, weaken fiscal discipline, and delay further interest rate increases by the BOJ.

The market reaction followed the release of a draft economic blueprint last month that called on the central bank to align its monetary policy with the government’s growth agenda while omitting longstanding language committing Japan to restoring fiscal health.

Government Rejects Concerns Over BOJ Independence

Speaking on Tuesday, Economy Minister Minoru Kiuchi, who oversees the drafting of the government’s economic blueprint, dismissed suggestions that the administration was attempting to influence the central bank’s interest rate decisions.

“There is no change to the government’s stance that specific monetary policy means fall under the jurisdiction of the BOJ,” Kiuchi told reporters.

He described market interpretations that the government wanted to restrain future BOJ rate increases as a misunderstanding. The remarks were aimed at calming investors who have questioned whether the government is prioritizing economic stimulus over inflation control and fiscal sustainability.

The BOJ has gradually moved away from its ultra-loose monetary policy after years of negative interest rates, but investors remain sensitive to any indication that political leaders may prefer lower borrowing costs to support public spending and economic growth.

Kiuchi also rejected suggestions that the administration was abandoning fiscal prudence. He said the revised economic blueprint should not be interpreted as an invitation for excessive government spending or an indication that Japan was retreating from efforts to stabilize its public finances.

According to Kiuchi, the government remains committed to responsible fiscal management even as it seeks to stimulate long-term economic growth. He added that there are currently no plans to amend the language contained in the draft document before it is presented for approval at a Cabinet meeting later this month.

One of the most closely watched changes in the draft blueprint involves Japan’s fiscal targets. Rather than maintaining annual goals for achieving a primary budget surplus, a long-standing measure of fiscal discipline that excludes debt servicing costs, the government proposes treating the surplus as a medium-term indicator assessed over several years.

Instead, policymakers intend to place greater emphasis on reducing Japan’s debt-to-GDP ratio, arguing that the measure provides a more comprehensive assessment of fiscal sustainability because it accounts for economic growth alongside government borrowing.

Supporters of the approach believe that stronger economic expansion can improve debt sustainability even if borrowing increases in the short term.

However, investors have questioned whether the shift signals reduced urgency in tackling Japan’s already substantial public debt burden, which remains the highest among advanced economies relative to the size of its economy.

Since assuming office in October, Prime Minister Takaichi has promoted what she describes as a “responsible, proactive fiscal policy,” arguing that decades of under-investment have weakened Japan’s economic competitiveness and industrial capacity. Her administration has advocated increased public investment in infrastructure, technology, national security, semiconductor manufacturing, and strategic industries as part of efforts to revitalize economic growth.

Several major economies are moving toward more active industrial policies and state-led investment following years of relatively restrained fiscal spending.

Bond Markets Question Funding Strategy

Despite the government’s assurances, investors remain concerned about how the planned increase in public spending will be financed. Analysts say uncertainty surrounding future borrowing requirements has contributed to rising government bond yields, as investors demand higher returns to compensate for increased fiscal risks.

Higher bond yields also increase borrowing costs for the government, potentially complicating efforts to finance new spending initiatives while servicing Japan’s massive stock of outstanding public debt.

Following decades of ultra-loose monetary policy aimed at combating deflation, the central bank has begun gradually normalizing interest rates as inflation becomes more firmly established.

Financial markets continue to closely monitor any signals regarding the pace of future tightening, particularly as inflation, wage growth and government spending remain key variables influencing policy decisions.

For investors, maintaining a clear separation between fiscal policy decisions and central bank independence remains essential to preserving confidence in Japan’s financial markets.

The government’s latest reassurances are therefore intended not only to calm bond markets but also to reinforce the message that future interest rate decisions will continue to rest solely with the Bank of Japan, even as the administration pursues a more expansionary economic agenda.

European financial regulators have unveiled separate initiatives aimed at strengthening the resilience of the banking sector, with the Bank of England proposing to ease capital requirements for major lenders while the European Central Bank ordered euro zone banks to prepare for emerging cyber threats powered by artificial intelligence.

The Bank of England’s Financial Policy Committee (FPC) announced plans on Tuesday to relax aspects of Britain’s capital framework, explaining that current rules have become more restrictive than intended and place some UK lenders at a competitive disadvantage compared with international peers.

The central bank said it will review how capital buffers are used so banks can draw on them more easily during periods of financial stress without automatically triggering restrictions on shareholder distributions such as dividends and share buybacks. It also proposed changes to the leverage ratio, which requires banks to maintain a minimum level of capital relative to their total assets regardless of the underlying risk profile.

When the leverage ratio was introduced following the global financial crisis, it was designed as a safeguard alongside risk-weighted capital requirements. However, the Bank of England said the rule has become binding for three of Britain’s seven largest banks, effectively forcing them to hold more capital than many international competitors.

Under the proposals, the Bank would remove one component of the leverage buffer and increase the proportion of capital buffers that can be released during periods of stress. The central bank estimates the changes would reduce leverage requirements for the largest UK lenders by around 0.2 percentage points, lowering requirements from slightly above 3%.

“The framework would become more proportionate and more effective by being better targeted,” the Financial Policy Committee said.

The proposed reforms follow similar moves by U.S. regulators, who relaxed leverage requirements for major American banks in November. That decision intensified pressure on UK authorities to review whether domestic banks were being placed at a competitive disadvantage, particularly as lenders compete internationally for capital and lending opportunities.

The Bank of England also plans to improve what regulators refer to as “buffer usability” by giving banks greater flexibility to use capital reserves during periods of market stress.

The changes would primarily affect large domestically focused lenders such as Lloyds Banking Group, NatWest Group and Santander UK, while internationally active banks would remain subject to global Basel banking standards.

As part of the proposal, banks would be granted several years to rebuild depleted capital buffers after using them during periods of financial stress, reducing pressure to curtail lending when economic conditions deteriorate.

The Financial Policy Committee also said it supports moving eventually toward a single releasable capital buffer, although such a reform would require international agreement among banking regulators.

“The FPC will work with the Prudential Regulation Authority and international authorities to pursue broad reform of the capital buffer framework and move towards this vision,” the committee said.

ECB Warns Of AI-Powered Cyber Risks

While the Bank of England focused on capital regulation, the European Central Bank turned its attention to a rapidly emerging threat: artificial intelligence-enabled cyberattacks.

The ECB instructed euro zone banks to submit detailed plans by October 31 outlining how they will protect themselves against increasingly sophisticated cyber threats enhanced by advanced AI systems.

The central bank warned that recent advances in generative AI have significantly increased the capabilities available to malicious actors, creating new risks for financial institutions and payment systems.

“These developments have potentially profound implications for the confidentiality, integrity and resilience of banks’ information and communication technology systems,” the ECB said in a letter sent to bank chief executives.

Banks have been instructed to strengthen protection for internet-facing systems, improve monitoring capabilities, accelerate software vulnerability remediation, and enhance security for third-party technology providers and open-source software.

The ECB also urged lenders to modernize ageing technology infrastructure, strengthen cyber hygiene practices and improve crisis management, recovery planning and information-sharing procedures.

To allow banks to focus resources on the new requirements, the ECB said it would postpone a separate information technology survey and may adjust planned supervisory inspections.

The cyber warning was reinforced by the European Systemic Risk Board (ESRB), which published a separate assessment highlighting the potential systemic consequences of large-scale AI-enabled cyberattacks.

The ESRB warned that successful attacks could undermine public confidence in banks, disrupt payment systems, and potentially trigger runs on financial institutions or even sovereign markets perceived as less secure.

“The ESRB considers these developments to be a source of systemic risks to the financial system,” the organization said.

The report outlined several scenarios, including state-sponsored cyber espionage, coordinated attacks targeting payment, clearing and settlement infrastructure, and misinformation campaigns designed to amplify financial instability following cyber incidents.

It also warned that the financial sector’s growing reliance on common software providers and shared technology platforms could allow cyber incidents to spread rapidly across multiple institutions.