I couldn’t attach the file because it has confidential stuff in. I tried copying and pasting the object into a new file I could attach, but it was fine there with handles round the edge of the item. But when I copied and pasted that back in to the main document, it had the massive box again.
I then realised that simply creating a new pixel layer creates a massive box. I.e. new pixel layer, then select another layer, then select the new layer. Massive box as in the screenshot even though nothing on the layer.
But after clicking around a bit more, now it just works: a new pixel layer doesn't create some massive big bounding box, and pasting in that graphic from the other document displays as expected. So I still have no idea how the issue occurred in the first place and thus how to avoid it in the future.