The Bank of Japan is expected to hike interest rates on Dec. 19 for the first time since January, pushing them to their highest level in 30 years and potentially exacerbating turmoil in debt markets.
Yields on Japanese government bonds have risen in recent weeks on worries about Prime Minister Sanae Takaichi's budget discipline, while the yen has weakened.
Japan's economy contracted 0.6 percent in the third quarter. At the same time, inflation has been above the BoJ's target of 2 percent for some time, with core consumer prices rising 3 percent in October.
"The urgency stems from policymakers' recognition that the window for hiking will close once external headwinds intensify," said BMI (Fitch Solutions) in a note.
The majority of economists polled by Bloomberg expect the BoJ to raise its main rate from 0.5 percent to 0.75 percent, which would be the highest since 1995.
The BoJ only began raising rates from below zero in March 2024.
The BoJ's move should help keep inflation in check, which would be welcome news to Takaichi, Japan's first woman prime minister.
She hopes to avoid the fate of her predecessor Shigeru Ishiba, who suffered a string of election debacles in part because of anger over rising prices.
The lower house last week approved an extra budget worth 18.3 trillion yen ($118 billion) to finance a major stimulus package to help households.
But more than 60 percent of the planned spending will come from government borrowing, rekindling market anxiety about Japan's fiscal health.
The country already has the biggest ratio of debt to gross domestic product (GDP) among major economies, with the International Monetary Fund projecting it to hit 232.7 percent this year.
