Japan's High-Market Policy Faces Fiscal Challenges Amid Massive Debt-Driven Stimulus Plan

Japan's government under Prime Minister Sanae Takagi is implementing a 17.7-trillion-yen economic stimulus package through unprecedented bond issuance, raising concerns about public debt sustainability and market volatility . The supplementary budget includes at least 11.5 trillion yen in new bond sales, significantly exceeding the 6.7 trillion yen issued under former Prime Minister Ishiba Shigeru in the same period last year . This marks the largest fiscal stimulus since the post-pandemic easing of economic restrictions .

The plan reflects a strategic tension between Takagi's pro-stimulus stance and fiscal prudence. While the government projects record tax revenues of 80.7 trillion yen for the fiscal year, creating a 3-trillion-yen surplus to offset borrowing needs, the total debt burden remains far higher than previous administrations . The supplementary budget is expected to be approved by the cabinet within days, with the full 17.7-trillion-yen spending package requiring additional funding .

Market reactions have been sharp. Long-term Japanese government bond yields reached a 24-year high in early November, while the yen remains weak against major currencies . This reflects investor anxiety over Japan's long-term fiscal health, exacerbated by the government's reliance on debt financing. Takagi attempted to reassure markets by stating total bond issuance for the 2025 fiscal year will remain below 2024's 42.1-trillion-yen level .

The policy shift contrasts with previous administrations' fiscal restraint. The current supplementary budget's debt scale is more than triple the 6.7-trillion-yen issuance under Ishiba, highlighting Takagi's departure from conventional deficit control measures . This approach aligns with broader efforts to stimulate economic growth but risks undermining confidence in Japan's debt management capabilities .

Domestically, the plan aims to address structural challenges through infrastructure investment and social spending. However, the reliance on bond markets raises questions about the government's ability to maintain low borrowing costs amid global interest rate normalization . The 11.5-trillion-yen bond issuance alone represents nearly 2.8% of Japan's 2024 GDP, according to tax revenue projections .

Internationally, the policy shift could influence regional capital flows and currency dynamics. The yen's weakness against the dollar and euro has already sparked speculation about central bank interventions, though no official statements have been made . For global investors, Japan's debt-driven stimulus represents both an opportunity for higher-yielding assets and a potential risk to asset valuations if fiscal concerns escalate .