Takaichi Faces Bond Market Backlash Over Japan's Debt Sustainability

Japanese Prime Minister Sanae Takaichi is facing increasing pressure from bond and currency markets as her fiscal expansion plans clash with investor concerns over Japan's debt sustainability. The country's 10-year government bond yield reached its highest level since 1996, hitting 2.809% on May 20.

Takaichi proposed a consumption tax cut in January, triggering bond selloffs and continuing through a supplementary budget in May and an economic blueprint unveiled in mid-July. With Japan's debt-to-GDP ratio near 260%, some government officials say markets are gaining unusual leverage over the country's fiscal policy.

Atsushi Takeda, chief economist at Itochu Research Institute, said Takaichi's public reassurances have not shifted investor sentiment because her underlying policies remain largely unchanged. He noted that while Japanese government bond yields have stabilized somewhat recently, that easing is due mainly to falling oil prices rather than improved confidence in the government's fiscal trajectory.

Takaichi has also faced criticism for her stance on monetary policy, having called additional Bank of Japan interest rate hikes 'stupid', a comment that prompted lawmakers to question her directly on the matter in March. The turmoil follows a pattern that began in January and has continued through subsequent spending commitments.