Issue:
March 2026 | Deep Dive
Could Takaichi’s big election win spark a spending spree that spooks the bond markets? An FCCJ panel gave their response.
An FCCJ Deep Dive event on February 17 carried the title: Japan at the Centre of a Bond Market Storm. This may have sounded a little dramatic, but Prime Minister Sanae Takaichi seems to be taking such stormy weather financial forecasts seriously.
The fiscal spending “bang” she appeared to have in mind when she took office last November – and which financial markets feared would become even louder after recent lower house elections her party won by a landslide – may not have turned into a whimper, but the rhetoric has been toned down.
Memories are fresh, in Tokyo as well as in London, of the fate that befell former British Prime Minister Liz Truss in 2022, when she came to office with big spending and tax cutting ambitions, only to be ejected from office a few weeks later when bond markets rebelled against her plans.
This is all to the good, not only for Takaichi herself, but also for Japan’s economy and even for the health of global financial markets. It might not be true to say that where the Japanese government bond (JGB) market goes, global bond markets follow. But what happens in Japan can certainly have much wider repercussions.
The Deep Dive panelists agreed that Japan was not at imminent risk of a fiscal crisis, despite widespread fears among analysts elsewhere that the risk is real. But they were not as sanguine about the prospects for global markets, especially in the U.S.
The Institute of International Finance in Washington noted in a recent commentary that “Japan sits at the intersection of global savings and global duration, and even small changes in its bond yields can have outsize effects on global portfolios.”
Hiroshi Nakaso, a former deputy governor of the Bank of Japan, recently stressed the importance of fiscal sustainability. Overseas investors, he said, “ tend to assess Japan's fiscal position more strictly than do domestic investors”.
At around 250%, Japan's government debt to GDP ratio is exceptionally high by international standards, Nakaso said. While rising tax revenues mean that an immediate downgrade of Japanese government bonds is not imminent, “market perceptions can change with alarming speed”, he added.
Mindful of that risk, Takaichi has since gone out of her way (including at the opening of a new parliamentary session in mid-February) to stress that her administration will pursue “responsible” fiscal policies that do not pile up extra government debt.
But with defense and social security spending set to rise sharply, it is difficult to see how she can easily adhere to those election pledges, especially in the light of her commitment to examine a temporary suspension of the consumption tax on food and beverages. Her spending and revenue assumptions simply do not add up, some analysts argue.
Naomi Fink, chief global strategist at Amova Asset Management (formerly Nikko Asset Management), sought to put into perspective recent alarms over the JGB market, in which yields at the long end of the market (30 to 40 years) rose sharply as bond prices fell.
This is a small corner of the JGB market, dominated by insurance company investors, as Fink pointed out, and yet the temporary turbulence there also generated reaction in the vastly larger U.S. government bond market. It was not a crisis, but it could be the “canary in the mine” for wider repercussions, she said.
There are fears that Takaichi’s Liberal Democratic Party, buoyed by the supermajority it secured in February’s lower house elections, could go on a borrowing spree to finance the economic growth she has promised. As Fink noted, financial conditions for the government are “very accommodative”.
Even so, the risk of any crisis in the JGB market were firmly played down by Jesper Koll, a veteran financial analyst, expert director at Monex Group, and an investment committee member of the Japan Catalyst Fund.
If Takaishi does boost fiscal spending significantly it will be on capital investment in partnership with the private sector in “dual use” areas such as defense and industrial development, and not in “helicopter drops” of cash to the public to boost private consumption, he said.
There is no evidence of fiscal profligacy under Takaichi, Koll added. Quite the opposite: last year, the Japanese government issued ¥41 trillion of new debt; this year, the budget is looking to raise ¥29 trillion. "And even if you were to fund the ¥5 trillion of the sales tax reduction for food that would get you to ¥34 trillion yen,” Koll said. “The primary deficit is more or less in surplus, and it is very difficult to point to any form of fiscal recklessness when you actually look at the amount of Japanese government bonds hitting the market."
Bond yields in Japan have spiked upwards of late and this provoked some alarm in markets here and overseas. But the rise was only to be expected given that Japan's economy is emerging from prolonged disinflation and stagnation, Koll said, adding that the yield rise had generally benefited Japanese financial institutions.
Hung Tran, a non-resident senior fellow with the Atlantic Council's GeoEconomics Center and a former official at the International Monetary Fund and the Institute of International Finance, shifted the focus of the debate to examine Japan’s fiscal situation through an international lens.
“Fiscal credibility in Japan has not been lost. but it definitely has been put under scrutiny,” Tran said. “The sudden rise in bond yields in the past month, in my view, is the adjustment of the risk premium to discount for further deterioration of the fiscal situation and questions about the debt sustainability of Japan going forward, particularly after the victory of Takaichi.
"This prospect of deterioration of fiscal discipline pushing bond yields higher in Japan, and given the interconnectedness in international bond markets, is happening in a situation where the fragility of the international system is in a weaker position now compared to what we saw before the global financial crisis 20 years ago.
"If government bond yields in Japan continue to rise, at some point, it will upset the equilibrium situation we have now, where Japanese institutions have invested hugely in international securities, particularly in the U.S.”
That could have crisis-like consequences.
Anthony Rowley is a columnist and contributor for the South China Morning Post.
