Japan's Takaichi Vows Fiscal Restraint as Record Budget Spooks Bond Market

Japanese Prime Minister rejected any “irresponsible bond issuance or tax cuts” on Tuesday, a statement of fiscal discipline that clashes with reports her government is readying a record-breaking budget. The mixed signals are putting investors on edge, sending Japan's 10-year government bond yield surging to its highest level since .

In an exclusive interview with Nikkei on December 23, said the country's national debt level is “still high.” Her comments are an attempt to balance two competing priorities: supporting an economy hit by high tariffs from U.S. President while maintaining market confidence in the yen and Japan's precarious public finances.

A High-Wire Act on Fiscal Policy

The core of the market's anxiety is the apparent contradiction between the Prime Minister's words and her government's actions. While she talks tough on debt, her administration is reportedly preparing a record budget that is alarming investors.

Takaichi currently enjoys a strong political mandate, with her government maintaining a approval rating. This gives her the political capital to navigate this tricky path, but it doesn't eliminate the economic risks if her government's credibility on fiscal discipline starts to fray.

Bond Market Signals a Credibility Test

The market isn't waiting for clarity. The yield on Japan's 10-year government bond (JGB) has already hit , a 26-year high. This isn't just an abstract number; it's a direct signal that investors are demanding a higher premium to hold Japanese debt amid rising fiscal concerns. Higher yields translate to increased borrowing costs for both the government and corporations, which could act as a drag on the entire economy.