Sanae Takaichi’s election victory has sharpened a familiar dilemma for Tokyo: a bold political mandate to revive the economy colliding with Japan’s towering public debt and fragile external balances. She has signalled an aggressive pivot — large-scale fiscal stimulus, stepped-up defence spending and a promise to suspend the 8% food consumption levy to ease household pain — moves that have cheered equity markets even as sceptics warn of mounting macroeconomic risk.
Japan already carries among the world’s heaviest sovereign burdens. IMF figures cited in market commentary put debt-to-GDP close to 230% and show core consumer prices running above the Bank of Japan’s 2% target for several years. That combination — swelling deficits and persistent inflation — complicates policy choices: how to finance stimulus without triggering a loss of confidence in sovereign debt or an abrupt currency and bond-market correction.
Chinese and international analysts represented in market coverage frame the most immediate danger as a fiscal misstep reminiscent of Britain’s 2022 ‘Truss moment’. A rush of unfunded tax cuts and higher spending could prompt a sell-off in Japanese bonds, a slide in the yen, and a rapid repricing of risk that would ripple through global markets. Bank of Japan policy and potential foreign investor behaviour make the path unpredictable: higher yields might be needed to anchor markets, but rising rates would increase debt-service costs at a precarious juncture.
Market players have already begun to price in both hope and hazard. Optimistic strategists at international banks have nudged Nikkei targets upward on expectations of domestic reflation and political stability, while others warn that the equity rally could mask deteriorating fundamentals if real investment and wages lag behind stock-market gains. Empirically, foreign cash has recently been an important marginal buyer of long-term Japanese bonds, and flows sensitive to interest-rate spreads and political signals could reverse swiftly.
Beyond immediate macro-financial risks, Takaichi’s agenda intersects with strategic ambitions that are harder and costlier to deliver. Tokyo’s pursuit of greater supply-chain independence has led to high-profile projects — notably plans to mine rare-earth-rich mud around the Ogasawara archipelago — but technical and cost hurdles are formidable. Industry studies suggest deep-sea extraction would be many times more expensive than Chinese land-based production, and even a successful haul would still require downstream refining capacity that China dominates.
Those constraints underline a broader geopolitical paradox: Japan can spend to boost defence and subsidise nascent industries, but strategic autonomy will remain limited if critical processing capacity and global market share stay concentrated elsewhere. The likely outcome is a long-term, subsidy-heavy competition in which taxpayers shoulder much of the bill, and strategic gains are incremental rather than transformative.
For global investors and policymakers the salient question is not whether bold action is politically attractive — it is — but whether it is sustainable. A misjudged fiscal campaign could destabilise markets, force sterilised interventions in foreign-exchange markets, and prompt the Bank of Japan to tighten earlier than planned. Conversely, well-designed, credible fiscal measures coupled with clear medium-term fiscal rules could revive growth without igniting a debt spiral. The balance will depend on political discipline, market confidence and the pace at which Japan can translate financial stimulus into durable rises in productivity and wages.