Japanese Prime Minister Sanae Takaichi is set to press markets and lawmakers on the nuances of her fiscal agenda as parliament opens debate next week on the administration's flagship spending program and a temporary cut to the consumption tax on food.
Takaichi campaigned on a platform she labelled "responsible, proactive fiscal policy," promising both higher public investment and a two-year suspension of an 8% levy on food. Now, with legislative scrutiny imminent, her challenge will be convincing investors that the package is not as broadly expansionary as its rhetoric suggests.
Markets have shown signs of calm in recent weeks, but concern lingers among investors who would react to any signal the government intends to borrow more heavily to finance the measures. On Wednesday the International Monetary Fund cautioned that any consumption tax reduction should be targeted and temporary, noting that Japan's high and persistent debt levels leave its economy "exposed to a range of shocks."
Observers say Takaichi's campaign slogan helped her win broad public support, but translating that slogan into policies may be more complex. "'Responsible, proactive fiscal policy' was a winning campaign slogan. But turning it into policy will be harder. The idea contains built-in contradictions. And boosting spending while cutting taxes risks fueling inflation," said David Boling, principal at the Asia Group, which advises companies on geopolitical risk.
"She needs to focus on the 'responsible' part of her fiscal policy. That emphasis would reassure the JGB market," Boling added.
Having secured a landslide election victory and a mandate to strengthen Japan's economy, Takaichi has reiterated her determination to move away from what she described as an "austerity mindset" and to direct more resources toward investment that supports longer-term growth. At the same time she has emphasized the need to maintain market confidence in Japan's public finances.
Upon being re-elected as premier, she said:
"In guiding economic policy, we are mindful of the importance of fiscal sustainability and will remain so."
She added that she was closely monitoring daily interest rate and currency movements and said:
"What’s key is to stably lower Japan’s debt-to-GDP ratio to achieve sustainable fiscal policy and gain market trust."
On monetary policy, Takaichi, who has been associated with support for easier monetary settings, stopped short of calling for ongoing low interest rates. Instead she said she hoped the central bank would "strive to durably hit its 2% inflation target accompanied by wage gains." Those remarks framed a policy address she plans to deliver to parliament on Friday, outlining measures intended to raise potential growth in the face of geopolitical risks, deepening labour shortages and rising social welfare expenses tied to an ageing population.
Market pressure appears to have influenced the tone of the administration. When Takaichi first became leader in October, markets reacted with a selloff in Japanese government bonds and a slide in the yen, as investors worried how the country - which carries the largest debt burden among developed economies - would finance larger fiscal commitments. Her pledge to suspend the food tax prompted another episode of bond and currency selling the following month, although market volatility subsided after the ruling party's more recent election success.
The government's fiscal 2026 budget, prepared in the middle of market turbulence, runs counter to the perception that the current administration plans sweeping increases in public spending. New government bond issuance remained below the 30 trillion yen threshold for the second consecutive year, lowering the share of the budget funded by fresh debt to a near three-decade low.
Although the budget reached a record size of $783 billion, much of the higher outlay reflected increased local allocation tax grants and rising debt-service costs, items that move alongside higher tax receipts and elevated bond yields. The IMF noted that the government primary deficit for 2025 is estimated to be smaller than it was in 2019 before the pandemic, and among the smallest in G7 economies in part due to stronger revenues and spending restraint.
Takaichi has argued that Japan's weak potential growth is driven in large part by insufficient domestic investment. "The reason why Japan’s potential growth rate remains stagnant is an enormous shortage of domestic investment," she said, adding:
"It’s not as if the government will ramp up spending. Rather, it must coordinate with the private sector."
Some analysts draw parallels between elements of Takaichi's agenda and those associated with former Prime Minister Shinzo Abe. Toru Nakazato, an associate professor at Sophia University, pointed out that Abe, while perceived as a proponent of large fiscal programs, often exercised restraint in increasing spending and moved to raise the consumption tax during his tenure.
"It’s true Sanae-nomics carries over some aspects of Abenomics. But the fact is, Abe didn’t expand fiscal spending much. Takaichi’s policies aren’t fiscally expansionary either. That’s where there are similarities," Nakazato said. "There’s a huge gap between Takaichi’s actual policies, and how they are perceived by media and markets. Filling that gap may be among her biggest challenges."
As debates over her spending and tax proposals begin in parliament, the administration faces the task of persuading both legislators and investors that its approach balances investment for growth with measures to keep fiscal metrics on a sustainable path. How convincingly the government can demonstrate that its policies will not require a material increase in borrowing is likely to determine whether markets remain calm or once again push back against perceived fiscal loosening.
With key details due to be presented to lawmakers and the public in the coming days, both domestic and international watchers will be assessing whether the words "responsible" and "proactive" can be reconciled in practice without reigniting pressure on the yen or Japanese government bonds.