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JAPAN Prime Minister Sanae Takaichi has begun softening her position on monetary tightening and government borrowing after global investors pushed back against her vast 20 trillion yen (US$137 billion) stimulus programme, sending long-term Japanese bond yields to fresh post-2008 highs and putting renewed pressure on the weakening yen.
Reuters cited on Friday that her change in tone was set in motion during a meeting on 17 November at her official residence, where Finance Minister Satsuki Katayama presented a chart on her tablet showing heavy selling of long-dated Japanese government bonds—selling that drives yields higher.
“The finance minister was becoming more vigilant,” said a person familiar with the meeting. “The prime minister also seemed quite concerned about the weak yen and bond-price declines.” The person requested anonymity because they were not authorised to speak publicly.
The moment underscored the market test facing Takaichi. She must secure financing for her stimulus agenda at a time when Japan’s debt-to-GDP ratio is the highest of any advanced economy and demand for government bonds is weakening as central bank and insurer purchases dwindle.
Japan’s benchmark 10-year yield has now climbed to its highest level since 2007, rising 25.5 basis points in just four weeks. The sharp jump has reverberated across global markets.
Takaichi has sought to reassure investors, telling Parliament there was “no possibility of a ‘Truss shock’,” rejecting comparisons to the 2022 collapse in British gilts and the pound following unfunded tax-cut proposals by then-prime minister Liz Truss.
She has also pledged to limit additional borrowing, while easing her earlier resistance to tighter monetary policy. At the same time, she has embraced initiatives aimed at curbing wasteful spending, described by some analysts as Japan’s version of a government-efficiency drive.
Katayama reinforced the message on Friday, saying the government was monitoring markets closely and would maintain the sustainability of public finances. Takaichi’s office did not comment on the 17 November meeting when contacted by Reuters.
Yet investors remain wary. “Takaichi’s plan is to expand the growth potential of Japan … but if that growth doesn’t materialise, then the only thing remaining is the huge amount of government debt,” said Toshinobu Chiba, a fund manager at Simplex Asset Management. “And that’s the problem.”
Takaichi’s ties to the late Shinzo Abe’s economic doctrine—Abenomics—have also fuelled concern. Despite inflation running at around 3 per cent and national debt exceeding 1.3 quadrillion yen, she surprised markets by preserving much of the ultra-loose policy mix when she took office.
She installed a dovish team of economic advisers and signalled willingness to water down Japan’s fiscal targets to enable multi-year spending on priority sectors. According to the Nikkei, she even rejected an initial draft of the stimulus plan because it was too modest.
“What you have is, I would say, a very loose policy mix overall and basically a monetary boom,” said Ian Samson, a multi-asset portfolio manager at Fidelity International. “I’m personally short yen because I think that’s the path of least resistance.”
The bond market presents another challenge. Net issuance is projected by Bank of America to rise sharply in 2026—nearly 11 trillion yen higher than in 2025—as redemptions taper and Bank of Japan purchases decline.
“The problem is … who’s going to buy these bonds?” asked Sally Greig, head of global bonds at Baillie Gifford. “Japan’s not the only one spending money.”
Dealers say short positions in bonds have ticked up slightly in recent days, though volumes remain limited.
The yen, meanwhile, is drawing increasing speculative interest. “There would definitely be interest to look at shorting the yen if we can move to between 153 and 154 per dollar,” said Patrick Law, head of APAC fixed-income, currencies and commodities trading at Bank of America.
The yen traded around 155 on Friday, down roughly 5 per cent since Takaichi became party leader in early October.
Forecasts remain divided. Morgan Stanley expects the yen to strengthen to 140 per dollar in the first half of 2026, arguing that the rise in yields reflects healthier economic reflation. But many institutional buyers remain cautious.
“Investors, including pensions and banks, still have a big capacity to buy more JGBs,” said Daiki Hayashi, head of Japan market sales and marketing at J.P. Morgan in Tokyo. “What they need is greater transparency. Until this is clarified, I think it will likely remain difficult for investors to buy JGBs aggressively.” - December 5, 2025
