Japan PM Takaichi: She will avoid reckless fiscal measures that could weaken market confidence

Japan PM Takaichi: She will avoid reckless fiscal measures that could weaken market confidence

Japan PM Takaichi: Balancing Proactive Fiscal Policy with Market Confidence

Japanese Prime Minister Sanae Takaichi faces mounting pressure to reconcile her administration's "proactive" fiscal stimulus with concerns over Japan's already strained public finances. With the country's debt-to-GDP ratio exceeding 250%—the highest among advanced economies—Takaichi has emphasized the need for "fiscal sustainability" while advancing growth-oriented measures such as a two-year suspension of the 8% food sales tax and increased investment in AI and infrastructure.

According to Reuters, Takaichi has insisted on a $135 billion stimulus program that she claims is fiscally responsible.

The government's fiscal 2026 budget, totaling $783 billion, reflects a strategic focus on reducing reliance on new debt issuance, with fresh borrowing remaining below 30 trillion yen for the second consecutive year. However, markets remain wary. Two-thirds of Japanese firms surveyed by Reuters expressed concerns about fiscal discipline, citing risks such as a weaker yen and rising borrowing costs.

The International Monetary Fund (IMF) has urged caution, warning that further fiscal loosening could destabilize bond markets and expose Japan to economic shocks.

Takaichi's administration has sought to address these concerns by stressing "responsible" fiscal management. In a February 19 speech, she reiterated her commitment to lowering Japan's debt-to-GDP ratio while coordinating with the private sector to boost growth. Toshihiro Nagahama, a key economic adviser, underscored the importance of avoiding inflationary pressures that could force rapid Bank of Japan (BOJ) rate hikes. The BOJ, currently targeting a 2% inflation rate, has raised its short-term policy rate to 0.75% amid persistent inflationary pressures.

Despite these efforts, Takaichi's policies remain contentious. While her government highlights growth-enhancing investments, critics argue that even "targeted" tax cuts risk undermining fiscal credibility. The prime minister's recent election victory, which secured a two-thirds Diet majority, has heightened expectations for bold spending but also intensified scrutiny over how to fund it without triggering a bond market selloff.

As Takaichi prepares to deliver her policy speech on February 20, the challenge lies in balancing short-term economic stimulus with long-term fiscal stability. With bond vigilantes and global markets closely watching, her ability to communicate a credible path to debt reduction will be critical to maintaining investor confidence.

(https://www.reuters.com/world/asia-pacific/japan-pm-faces-challenges-selling-proactive-fiscal-policy-bond-vigilantes-2026-02-19/): Reuters, NHK
(https://www3.nhk.or.jp/nhkworld/en/news/20260219_02/): NHK
(https://www.reuters.com/world/asia-pacific/two-thirds-japan-firms-concerned-about-pm-takaichis-fiscal-discipline-2026-02-18/): Reuters
(https://www.reuters.com/world/asia-pacific/japan-pm-takaichis-reflationist-aide-calls-fiscal-discipline-2026-02-05/): Reuters
(https://www.france24.com/en/live-news/20251121-japan-s-takaichi-insists-135-bn-stimulus-fiscally-responsible): France24