Japan's economic revival strategy under new Prime Minister Sanae Takaichi has triggered unexpected turbulence in financial markets, with investors fleeing government bonds and equities following the administration's aggressive fiscal expansion announcement this week.
High-Stakes Economic Experiment
The Takaichi administration's stimulus package – reportedly exceeding ¥50 trillion ($340 billion) – aims to counter deflationary pressures through infrastructure spending and consumer subsidies. However, markets reacted sharply on Wednesday, with the Nikkei 225 plunging 3.2% and 10-year government bond yields spiking to 1.8%, their highest level since 2025 began.
Debt Dilemma Intensifies
Analysts warn the stimulus risks exacerbating Japan's public debt burden, already the world's largest at over 260% of GDP. 'This creates a policy paradox,' explained Nomura Securities chief economist Takashi Miura. 'The Bank of Japan faces mounting pressure to tighten monetary policy even as fiscal expansion accelerates.'
Regional Ripple Effects
The market volatility has impacted Asian currencies, with the yen weakening to ¥148 against the US dollar. Regional export stocks fell broadly on concerns about Japanese industrial competition fueled by new subsidies. Investors are now scrutinizing whether the administration will modify its approach ahead of crucial G7 economic meetings scheduled for early 2026.
