Updated on 25th October, 2025
This Article Was First Published on TurkishNY Radio.
Japan’s central bank has delivered an early warning about increasing risks in the nation’s financial markets, warning that Japan’s stock market may be overheating.
The Bank of Japan (BOJ) said the breakneck rally in equities, with Tokyo’s Nikkei 225 index up nearly 24% from the start of the year, has been too good to be true and was being fuelled by excessive optimism over a fresh fiscal boost under new Prime Minister Sanae Takaichi.
The BOJ’s semi-annual Financial System Report said increased speculative trading is raising the risk of sudden market corrections, with strong foreign inflows and leveraged hedge fund trading contributing to such excessive speculation.
Analysts said Tokyo property prices and those in other major cities were becoming more expensive amid a weaker yen, fueling inflows from foreign funds hungry for better returns.
With Japan’s economy proving resilient, the central bank also highlighted the need for vigilance as financial imbalances, such as in equities and real estate, build up.
Some economists warn that if stimulus spending grows substantially, it could put pressure on long-term bond yields and create stress in Japan’s debt market.
The BOJ maintains that ”the overall financial system is stable” but warns of the need for “close monitoring of asset-price trends” so as not to create and destabilize bubbles.
Japan Stock Market Overheating Sparks JGB Volatility
The BOJ has also expressed “alarm” about the increasing number of foreign hedge funds taking positions in the Japanese government bond (JGB) markets with borrowed money.
The bank warned that “fast position adjustments and deleveraging can also lead to excessive movements in asset prices.” Before May, hedge funds unwound bond bets that sent long-dated JGB yields soaring on speculation of fiscal spending, a situation that could reoccur should stimulus hopes change.
Real estate prices, notably in urban Tokyo but generally also, are on a steep uptrend (new condominium prices are +20.4% yoy in Apr-Sep) and singled out as susceptible to sentiment shifts. So the notion of overheating risk applies to more than just equities but to the entire asset-price complex too.
Political Change & Stimulus Optimism Adding to the Pressure
Markets surged in response to the parliamentary vote for Sanae Takaichi to become Japan’s first female prime minister, driving speculation over big fiscal spending and a weaker yen. The Nikkei soon reached record highs.
Stimulus Bias The new government’s inclination toward stimulus poses a quandary for the BOJ: While more fiscal support might boost growth and inflation, it may also lead to more bond issuance, higher yields, and market tumult.
The BOJ says it’s “paying close attention” to developments in-risk asset prices, including those in stocks due to banks’ market-risk exposure.
Stability Versus Overheat: BOJ Walking a Tightrope
The BOJ’s report said Japan’s financial system is stable overall, as its banks have a high capital ratio and relatively stable financing. But the recognition of the overheating threat suggests that stability is conditional on no sudden shake-up or corrective crash.
The BOJ may still look for signals of financial imbalances (asset-price bubbles, credit growth) when conducting policy. As the report says, “Structural factors such as … excessive search for yield” may cause overheating unless controlled.
Implications & What to Monitor
Based on the central bank’s alarm, several signals bear close watching:
How quickly and in what amount any spending package is announced.
JGB’s price action, particularly beyond 30s, and hedge fund deleveragings.
Momentum in real estate prices in Tokyo and other metropolitan areas.
Bank holdings of equities and property assets since the BOJ has already warned about the risk from these assets.
FX and yen pricing trends, as a softer yen has bolstered asset injections and price forces.
Why “Overheating Risk” Keyword Matters
This article signals its departure from that view with a closer look at so-called overheating risk, which is repeated over and over in the BOJ report and in its asset-price behavior.
It is a signal of the fact that, instead of trying to correct imbalances once they occur, you will acknowledge them preemptively. Using this keyword emphasizes the central bank’s transition from accommodative to monitoring.
By framing overheating risk ten different ways in this piece, the broader market-watch community gets a sense of the size and construct of this worry.
Final Word
The BOJ’s warning of potential overheating underscores a new regime in Japan’s markets seeing asset‐price gains, leveraged foreign flows, real estate acceleration, and guarded expectations for stimulus coming together.
The financial system is stable as of today, but that “red” signal on stocks should be taken as a warning light. It doesn’t mean the downdraft will result in a catastrophic crash, but the capacity for volatility remains perched at an extreme risk level, and indeed prices are stretched across both valuation and money risk.
Exposure of banks and global reliance on Japanese capital flows mean the fallout from a correction could extend far beyond Tokyo.
Glossary of Essential Terms
1. Bank of Japan (BOJ)
The central bank of Japan is responsible for policy on money, interest rates and financial stability. It oversees market inflation, asset bubbles and systemic risks.
2. Overheating
An environment in which asset values, including those for stocks and real estate, increase too quickly because of speculation or excessive liquidity, carrying the risk of future market corrections.
3. Japanese Government Bonds (JGBs)
Bonds the Japan’s government issues to repay public works spending. Changes in their returns influence interest rates, market confidence, and the stability of the financial system.
4. Hedge Funds
Funds are invested according to sophisticated strategies, such as leveraging and derivatives, in order to stimulate returns. They’re capable of adding to volatility in financial markets such as JGBs.
5. Fiscal Stimulus
Government expenditures intended to stimulate growth. In Japan, it is frequently a package of infrastructure projects and subsidies that bear on market sentiment and the national debt level.
6. Financial Imbalance
An imbalance in asset prices, lending, or investment flows that can lead to instability, which is often identified when markets exhibit speculative or unsustainable behavior.
7. Nikkei 225 Index
The leading stock market indicator of Japan, comprising 225 of the largest companies listed on the Tokyo Stock Exchange. Its gyrations are both a reflection of investor sentiment and the economy’s health.
8. Real Estate Price Index
An indicator of fluctuations in property prices. In Japan, increased prices of metropolitan real estate may signal speculative investment and lead to overheating risks.
Frequently Asked Questions About Japan’s Stock Market Overheating
1. In what context is the Bank of Japan calling the stock market overheating?
This is characterized by overly rapid asset price increases spurred by speculation and leverage that increase the potential for a sharp market correction or financial instability.
2. How come hedge funds and JGB volatility are related to overheating risks?
International hedge funds employing leverage in Japanese bonds: the rapid moves in positions can exacerbate volatility by affecting broader financial markets and investor confidence.
3. How Does the BOJ Gauge Overheating in Japan’s Financial System?
Via a financial heat map monitoring asset prices, bank exposure, and credit growth to spotlight sectors’ equities, for example, experiencing divergence from sustainable trends.
4. What can be done to calm Japan’s soaring stock market?
Reasonable fiscal policy, prudent monetary policy, and more effective risk prevention and control could stabilize inflation expectations so as to maintain the long-term stability of financial markets.
