News
Following Sanae Takaichi’s victory in the Liberal Democratic Party’s leadership election, Tokyo’s stock market surged sharply.
The Nikkei 225 jumped 4.75%, closing at 47,944.76 yen, while the TOPIX rose 3.1% — a clear sign that investors have priced in high expectations for her economic policies.
In contrast, the yen weakened by nearly 1.8% against the U.S. dollar, trading around ¥150.13 per dollar, marking a new low.
Japan’s bond market also saw notable volatility. Yields on 30-year and 40-year government bonds climbed significantly, with the 40-year yield jumping to 3.505%, suggesting strong selling pressure in the long-term bond sector.
Analysts say these moves reflect investors’ bets that Takaichi will pursue aggressive fiscal spending while maintaining monetary easing in cooperation with the Bank of Japan.
Source: Reuters
Policy Focus
“A pro-growth fiscal stance” — and why some abroad recall Liz Truss
In her campaign, Sanae Takaichi pledged “bold fiscal expansion” and continued monetary easing in coordination with the central bank.
Her approach prioritizes supporting investment and wage growth without cooling the economy despite rising prices.
This stance has drawn comparisons overseas to former U.K. Prime Minister Liz Truss’s short-lived government, which also pursued fiscal expansion at a time of mounting inflation.
In 2022, Truss simultaneously launched large-scale tax cuts and fiscal expansion.
However, the British economy was already in a rapid post-COVID recovery phase, with double-digit inflation fueled by energy price spikes and labor shortages.
When the Truss government announced tax cuts without clear funding sources, markets grew alarmed — fearing higher inflation and fiscal instability.
As a result, U.K. government bonds plummeted, the pound crashed, and mortgage rates surged — squeezing household finances.
This turmoil became known as the “Truss Shock.”
Her government collapsed after just 45 days, a global reminder of how quickly markets can lose faith when fiscal credibility is undermined.
“Responsible fiscal expansion” — Takaichi’s key distinction
The situation facing Japan today is markedly different from that of the U.K. in 2022.
Japan’s inflation rate remains around 2%, initially driven by imported energy and food costs but now increasingly supported by higher labor costs amid a severe worker shortage.
In other words, Japan’s inflation began as cost-push but is now partly sustained by domestic wage growth — a sign of a tightening labor market rather than overheating demand.
Even so, Japan’s economy is only just emerging from decades of deflation, far from the overheated conditions Britain faced.
For this reason, Takaichi frequently uses the phrase “responsible fiscal stimulus”, signaling that she aims to support growth while preserving market trust in Japan’s public finances.
Unlike Truss, who prioritized tax cuts without fiscal backing, Takaichi appears to favor a more balanced and gradual expansion.
Moreover, Japan’s debt structure differs fundamentally from Britain’s: most Japanese government bonds are held domestically, particularly by the Bank of Japan, meaning the risk of a sudden sell-off by foreign investors is relatively small.
However, this does not make Japan immune to market reactions.
Instead of a bond crash, fiscal concerns can manifest as a weaker yen, reflecting a gradual erosion of confidence in the currency rather than the debt itself.
Indeed, following Takaichi’s election victory, the yen slid past ¥150 per dollar while stock prices soared — suggesting a market caught between optimism over stimulus and unease about fiscal sustainability.
How the UK Still Lives with the “Truss Shock”
In light of Japan’s recent developments, overseas discussion boards such as Reddit have been revisiting the legacy of the Truss Shock — the market chaos triggered by former Prime Minister Liz Truss’s failed “mini-budget.”
One such discussion was titled:
“Liz Truss is long gone – but her fiscal meltdown still dictates every step Labour makes.”
In other words, even long after Truss’s short-lived administration collapsed, her policy failure continues to cast a shadow over Britain’s fiscal and political direction.
The debate centered on how a single loss of market trust can force governments into years of constraint, reshaping not only fiscal policy but also the broader political landscape.
Although Japan was not explicitly mentioned in the thread, the underlying themes — the difficulty of regaining fiscal credibility and how markets constantly monitor political decisions — offer valuable insights for Tokyo as well.
The following are translated excerpts from that Reddit discussion.
Reddit Users Discuss Britain’s Fiscal Trap
Below are translated excerpts from user comments in the Reddit discussion thread.
These represent a range of opinions shared by users reflecting on the U.K.’s ongoing fiscal challenges after the Truss Shock.
“We’ve boxed ourselves in — not because of fiscal rules, but because successive governments have run unsustainable primary deficits for decades.
If our debt-to-GDP ratio were 30%, we could spend freely without worry. But at 100% and still in deficit, it’s no wonder the Treasury fears expanding further.
Eleven percent of government spending already goes to debt interest — and that’s under mild conditions. A recession would make it far worse.”
“Under current fiscal policy, the Office for Budget Responsibility projects debt-to-GDP to reach 270% by 2070. Unless we act now, we’re in for a rough ride.”
“Policies cater to the elderly because they’re the only ones who vote. Make voting mandatory, and we’d finally get policies that favor the young.”
“Mandatory voting with a ‘None of the Above’ option sounds interesting, and I’d generally support it. But has Australia, where voting is compulsory, really had better or more representative governments? Maybe, maybe not.”
“Even if you force people to vote, it doesn’t mean they’ll be engaged. Many would just vote randomly, favoring simple slogans and charismatic politicians.
And even if it worked, it wouldn’t help the young — Britain’s median age is 41 including children, likely around 48 among adults.
Elderly-focused policies exist not only because older people vote, but because there are simply more of them.”
“Managing debt while boosting long-stagnant growth is by far the UK’s most urgent challenge.
Without tackling it, everything else — growth, public services, investment, defense — will suffer.
If we weren’t spending 11% on debt interest, we could invest more in education or law enforcement.
We must reduce that burden or we won’t survive the next recession. Fiscal rules are essential to contain debt, increase investment, and maintain confidence — we’re dangerously close to a doom loop.”
“The problem is that this approach risks a doom loop of its own.
To reduce debt, we need growth — but austerity weakens growth by cutting vital spending on healthcare and social care.
Saying ‘this is the only way’ is a recipe for disaster.”
“The current government is truly boxed in.
Voters want three impossible things at once: no tax hikes, fully funded public services, and no pension cuts.
It’s politically impossible to deliver all three. Even the most talented leader couldn’t make that sound appealing.”
“The biggest issue is that government itself has become ungovernable.
Laws like the Net Zero Act and Equality Act require constant impact assessments and positive outcomes, paralyzing decision-making.
It’s nearly impossible to change course or reform when every move is subject to judicial review.”
“The idea of ‘spending for growth’ has failed. The only option left is cutting welfare.
Tax hikes stifle growth, and all other levers are gone.”
“Technically, the UK’s debt-to-GDP isn’t that high. But the Treasury issued inflation-linked bonds, so our interest burden as a share of GDP is now the world’s second-highest after Colombia.”
“There’s an obvious way to lift growth: rejoin the EU.
Even announcing it would lift the stock market several percent — the opposite of what happened after the Brexit vote in 2016.
Studies show Brexit cut UK trade by 13.2% in 2022 and shrank the overall economy by 4%.
Rejoining would boost trade and tax revenue — the fastest single way to improve the economy.
The only problem? One-third of the population would throw the biggest tantrum in history.”
“Long-term, that might help. But short-term, it would mean endless negotiations and more uncertainty.
It’s not the quick fix some imagine.”
“Yes, there’d be a short-term market rally on the news, but membership talks would raise uncertainty about regulations, migration, and contributions — freezing new investment.
Why would companies launch products under current rules when future standards could change?”
“We’re at a crossroads: continue appeasing markets with self-imposed fiscal rules, or boost spending to restore living standards.
But the author ignores what happens if the bond market rejects that.
If the IMF steps in, spending will be slashed anyway.
It’s a gamble with the country’s future, and welfare spending will remain unsustainable.”
“For those who don’t understand — the first thing that happens when you break fiscal rules is bond yields spike.
The 10-year yield is 4.56% now; break the rules and it’ll top 5%.
Borrowing costs rise, debt piles up, confidence falls, and yields rise again — a vicious cycle.
Eventually no one buys our bonds, and we’re forced into cuts anyway.”
Reflection
Reading through these discussions, one realizes that the Truss Shock is not just a past mistake but an ongoing constraint shaping Britain’s economic reality.
The struggle to balance growth, fairness, and fiscal discipline is one many nations share — and Japan may soon face similar tests.
Britain’s contradictions exploded all at once, destroying market confidence overnight.
Japan’s stability, built on years of low interest rates and steady government spending, may appear calm but rests on fragile ground.
If that balance wavers, the market’s reaction could be swift and unforgiving.
Analysis — Japan’s Fiscal Crossroads
What “Responsible Fiscal Expansion” Means for Japan
Sanae Takaichi’s vision of “responsible fiscal stimulus” seeks to balance economic relief with fiscal credibility.
Her core agenda includes two key proposals:
the abolition of the provisional gasoline tax to lower fuel prices, and a refundable tax credit aimed at low- and middle-income households.
The first measure would directly reduce household living costs by cutting energy-related expenses,
while the second combines tax reductions and income support to raise disposable income.
Both are designed as short-term boosts for households — effective in the near term, but raising questions about funding sources and long-term sustainability.
In the medium term, Takaichi’s challenge is not merely how to stimulate demand, but how to chart a credible fiscal exit strategy while keeping growth alive.
The delicate balance between stimulus and stability will define whether markets maintain confidence in Japan’s finances.
Mounting Fixed Costs: Between Social Security and Defense
What weighs most heavily on Japan’s national budget are the expenditures that cannot be cut easily.
Social security spending has already surpassed ¥140 trillion and continues to rise as the population ages.
Healthcare, pensions, and nursing care are politically sensitive areas — easy to expand, nearly impossible to shrink.
At the same time, defense spending is growing rapidly.
The government aims to raise defense expenditures to 2% of GDP by fiscal 2027,
covering new equipment, cyber defense, and ammunition stockpiles — all requiring permanent funding.
Takaichi has described these as “investments for the future” and has even suggested financing part of the increase with construction bonds.
However, the Ministry of Finance remains cautious, warning that such measures could weaken fiscal discipline.
The situation has become more complex since Donald Trump returned to the White House in 2025.
His administration is once again pressing allies to shoulder greater defense costs,
while simultaneously reinstating high tariffs on China and Europe —
moves that have reignited global inflationary pressures.
As a result, import prices for energy, food, and raw materials have risen again,
feeding a new wave of import-driven inflation in Japan.
The combination of higher global prices and increased defense obligations places Tokyo in a tightening vise —
caught between domestic welfare costs and external security demands.
The Risk of Rising Interest Rates — The End of Japan’s “Safety Valve”
In March 2024, the Bank of Japan officially ended its negative interest rate policy and yield curve control (YCC),
marking a historic shift from the monetary framework that had supported “Abenomics.”
Since then, long-term interest rates have been left to market forces, and the era of artificially low yields is over.
As of late 2025, 10-year bond yields hover around 1.3–1.4%,
up from near zero just two years ago.
This steady rise means Japan’s debt-servicing costs — once kept in check by ultra-low rates — are now beginning to climb.
Even though most Japanese government bonds are domestically held,
a sustained rise in yields would tighten fiscal space and test investor confidence.
If markets begin to doubt the government’s commitment to fiscal soundness,
higher yields could trigger a downward spiral — pushing up interest payments, weakening the yen, and destabilizing the bond market.
In short, Japan no longer has the “safety valve” of zero rates that once absorbed fiscal excess.
Its debt, the largest among advanced economies, is now fully exposed to market sentiment.
Fiscal and Market Tensions: The Challenge of “Active Yet Responsible” Policy
Takaichi’s fiscal philosophy rests on a difficult balance:
stimulate growth and raise tax revenue through investment,
without undermining the long-term sustainability of public debt.
Yet the environment in which she governs has changed dramatically.
Global inflation is being rekindled by U.S. protectionism,
Japan’s defense and social security costs are both climbing,
and the end of YCC means higher borrowing costs ahead.
If these three forces — rising global inflation, expanding fixed expenditures, and higher domestic interest rates — converge,
Japan could face an unprecedented fiscal stress test.
Even well-intentioned economic policies may falter if markets lose confidence.
As the Truss Shock demonstrated, financial credibility can collapse in a matter of weeks once investors believe a country has lost control of its fiscal trajectory.
Conclusion – Politics or Markets: Who Commands Trust?
Japan’s economy today rests on a fragile balance —
a “quiet stability” built upon years of ultra-low interest rates and large fiscal spending.
But that foundation is starting to shift.
The Bank of Japan has exited its extraordinary monetary easing,
defense obligations are rising, and global inflationary pressures are back.
In the short term, household support and wage growth remain necessary.
Yet in the medium term, what truly matters is whether Japan can outline a credible fiscal exit and a sustainable growth strategy.
Without a clear path forward, even the strongest economic narrative risks losing market trust.
The United Kingdom under Liz Truss failed precisely on that front —
markets saw bold promises without credible funding,
and confidence evaporated in mere weeks.
The result was soaring yields, a plunging currency, and a crisis of political legitimacy.
Japan is not Britain.
Its debt is held mostly at home, its inflation is still moderate,
and its policymakers have learned from decades of stagnation.
But the parallels are unsettling:
rising interest rates, expanding social and defense costs,
and an electorate demanding both tax cuts and generous spending.
These contradictions, if left unresolved, could one day test Japan’s stability just as they did the UK’s.
Ultimately, the key question is no longer whether Japan can spend,
but whether it can convince markets that it knows how to stop.
Monetary policy can no longer shield fiscal excess;
the bond market and exchange rate will now serve as the true referees of discipline.
“A nation’s course is determined not by political will, but by market trust.”
That is the enduring lesson of the Truss Shock —
and the challenge that now faces the incoming Takaichi administration.
How Japan balances growth, credibility, and security in the years ahead
will shape not only its own destiny, but the global financial landscape that watches it closely.
See you again in the next article.
