The Japanese government bond market has been turbulent these days. On December 17, the 10-year Japanese government bond yield briefly touched 1.978%, a new high since June 2007, and was about to break the 2% mark that has not been surpassed in nearly 20 years.

Why is this happening? The market has given two reasons. First, expectations of an interest rate hike by the Bank of Japan are growing stronger. Second, Prime Minister Sanae Yoshihide's fiscal expansion policies have started to worry traders about the deterioration of Japan's fiscal health.

Is this move by the central bank stable? Based on current market consensus, the Bank of Japan is highly likely to announce a rate hike at this Friday’s meeting—by 25 basis points, raising short-term interest rates from 0.5% to 0.75%. If this materializes, it will be Japan’s highest interest rate in thirty years. Governor Ueda and Boyo has already hinted that he will emphasize the determination to raise rates again on Friday, and may also reveal some plans for the next steps. However, the specific approach will depend on how the economy responds to each rate hike.

The government also shows no opposition. Finance Minister Shunichi Suzuki said on Tuesday that there is "no disagreement" between the government and the central bank on economic judgment, which was interpreted as an implicit approval of the rate hike to 0.75%.

Data also supports this. The recent short-term economic outlook survey released by the central bank indicated that labor shortages are becoming more severe for companies, and most sectors expect significant wage increases next year, providing support for the central bank’s tightening measures.