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Japanese Prime Minister Sanae Takaichi is preparing to defend her “proactive” fiscal policies as parliament begins deliberations on her flagship spending and tax cut plans next week. While Takaichi has pledged to boost investment and suspend the 8% consumption tax on food for two years, investors remain cautious about how Japan will fund these measures amid the world’s highest debt-to-GDP ratio among developed economies.
Financial markets have stabilized following her recent election victory, but concerns persist over potential increases in Japanese government bond (JGB) issuance. Earlier market volatility pushed bond yields higher and weakened the yen, reflecting investor anxiety about expanded public spending. Takaichi has since emphasized fiscal sustainability, stating that maintaining market trust and steadily reducing Japan’s debt-to-GDP ratio are key priorities.
The International Monetary Fund (IMF) recently urged Japan to keep any consumption tax cuts targeted and temporary, warning that high and persistent public debt leaves the economy vulnerable to shocks. Analysts also caution that combining higher spending with tax reductions could stoke inflation if not carefully managed.
Despite her reputation as a fiscal dove and supporter of loose monetary policy, Takaichi has softened her tone, expressing hope that the Bank of Japan will sustainably achieve its 2% inflation target alongside wage growth, without directly pressuring for prolonged low interest rates.
Japan’s fiscal 2026 budget, drafted during recent market turbulence, suggests restraint. Although the total budget reached a record $783 billion, new bond issuance remained below 30 trillion yen for the second consecutive year, reducing reliance on fresh debt to its lowest level in decades. The primary deficit for 2025 is projected to be smaller than pre-pandemic levels and among the lowest in the G7.
Takaichi argues that Japan’s stagnant growth stems from insufficient domestic investment rather than government under-spending. By coordinating with the private sector, she aims to strengthen economic resilience while balancing fiscal responsibility—bridging the gap between market perception and policy reality.
