Japan tax and spending promises ahead of snap elections next month have unsettled investors, triggering sharp swings in the yen and government bonds and reviving concerns about the sustainability of the country’s public debt.
Market volatility accelerated after Prime Minister Sanae Takaichi outlined plans to suspend parts of Japan’s consumption tax if her Liberal Democratic Party secures victory in the February 8 vote.
The reaction reflects unease over Japan’s already heavy debt burden—the largest among advanced economies—and has spilled beyond domestic markets at a time when major countries are running large fiscal deficits.
What the Prime Minister Has Proposed
Takaichi said she would pause the 8% consumption tax on food and non-alcoholic beverages for two years if returned to office, following her decision to dissolve the lower house.
Government estimates suggest the move would create an annual revenue gap of about 5 trillion yen ($31.7 billion). Takaichi, who supports the high-spending, easy-money approach associated with former prime minister Shinzo Abe, said the shortfall could be covered by reviewing existing spending and tax incentives, without providing specifics.
The pledge follows the cabinet’s approval in November of a 21.3 trillion yen ($137 billion) stimulus package—the largest since the pandemic—including cash payments to families with children, temporary utility subsidies and food vouchers.
Why Markets Reacted Sharply
Japanese government bond yields jumped after the announcement, with 40-year yields briefly climbing above 4%—a record—amid a broad sell-off.
Bond markets are closely watched as a barometer of fiscal health. When investors question a government’s ability to manage its finances, they demand higher yields to compensate for risk.
“When the planned consumption-tax cut was announced, it unsettled holders of Japanese debt, who then required higher compensation,” said Anastassia Fedyk, an assistant professor of finance at the University of California, Berkeley.
Japan’s debt-to-GDP ratio already exceeds 230%, far above peers such as the United States, United Kingdom and France. Compounding the pressure, the Bank of Japan has been tapering bond purchases as it moves away from decades of ultra-low rates, limiting its ability to cap yields.
“Investors reacted because the package looks like near-term fiscal loosening just as the BOJ is trying to normalise policy,” said Sayuri Shirai, an economics professor at Keio University.
Global Spillovers
The sell-off reverberated overseas. Yields on long-dated US Treasuries rose, reflecting the possibility that Japanese investors—who held about $1.2 trillion in US government debt as of November—could redirect funds back home as domestic yields rise.
US Treasury Secretary Scott Bessent said he expected dialogue with Japanese counterparts to help steady markets. Media reports later indicated US and Japanese officials were discussing measures to support the yen.
“Japan matters globally through capital flows,” Shirai said. “If domestic yields rise, demand for foreign bonds can fall, nudging global rates higher.”
Higher yields increase borrowing costs and debt-servicing burdens worldwide, amplifying concerns in heavily indebted economies.
Is Japan Facing a Financial Crisis?
Most economists say a crisis is unlikely in the near term. Much of Japan’s debt is held domestically and denominated in yen, reducing vulnerability to sudden foreign capital flight, and interest rates remain lower than in many advanced economies.
“The situation is more manageable than it appears,” said Thomas Mathews of Capital Economics, noting that net debt ratios have been improving and budget deficits are not unusually large by global standards.
Still, analysts say markets are testing the credibility and communication of fiscal policy.
“Japan may be the trigger, but the message applies broadly to countries with large structural deficits,” said Masahiko Loo of State Street Investment Management. “Even fiscally stable nations can face market discipline if confidence wavers.”