Japan PM's Political Struggles Fuel Yen and Bond Market Concerns

Japan PM's political struggles have intensified yen and bond market concerns as Sanae Takaichi faces falling public support and growing pressure over her economic policies.

Investors are closely watching Japan's fiscal direction, while uncertainty around government spending, tax cuts, and monetary policy continues to weigh on financial markets.

Her government wants to support households through tax cuts and higher spending, but investors fear those policies could worsen Japan's already heavy debt burden.

That has increased pressure on both the Japanese yen and the country's bond market, making it harder for officials to calm investors.

Why Are Markets Becoming Nervous?

Takaichi's approval ratings fell to their lowest level since she became prime minister, largely because rising prices continue to affect households. Inflation has pushed up the cost of living, while the weaker yen has made imported goods more expensive.

Highlights:

• Falling public support for Prime Minister Sanae Takaichi is increasing concerns over Japan's fiscal policy and market stability.
• Investors remain worried about rising government debt, a weaker yen, and higher bond yields despite government reassurances.

At the same time, the government continues to support tax cuts and public spending to boost economic growth.

Investors worry that these measures could increase borrowing and make Japan's public finances even weaker. Those concerns have pushed Japanese government bond (JGB) yields to their highest levels in decades, reflecting expectations that the government may need to issue more debt.

Although Takaichi has promised to improve communication with financial markets, she has also made it clear that she does not plan to abandon her growth-focused policies.

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A Difficult Political Balance

The prime minister now faces a difficult choice.

Scaling back spending plans could reassure financial markets but risk disappointing voters already struggling with higher living costs. Continuing with expansionary policies may help maintain political support, but it could increase concerns about Japan's long-term fiscal health.

One proposal attracting attention is the government's plan to temporarily reduce the country's 8% food tax. While consumers would benefit from lower prices, economists say the government has not yet explained how it will compensate for the loss in tax revenue.

Analysts believe the lack of clear funding plans is one of the main reasons investors remain cautious.

Yen and Bonds Stay Under Pressure

The government's economic strategy has also affected Japan's currency.

The Japanese yen remains near multi-decade lows against the US dollar, despite repeated warnings from officials that they are prepared to act against excessive currency movements.

Finance Minister Satsuki Katayama has tried to reassure investors by saying the government will keep future debt issuance within reasonable levels. Officials have also shifted their focus toward providing clearer guidance on fiscal policy instead of relying only on verbal support for the yen.

Even so, market confidence has yet to recover.

What Investors Are Watching Next

Attention now turns to upcoming policy meetings by both the Bank of Japan (BOJ) and the US Federal Reserve. While both central banks are widely expected to leave interest rates unchanged, investors will closely watch their comments for clues about future policy.

A stronger US dollar or signs that US interest rates could stay higher for longer may put additional pressure on the yen.

For now, investors remain focused on whether the Japanese government can present a credible plan that supports economic growth while also controlling debt. Until markets gain greater confidence in that balance, volatility in Japan's currency and bond markets is likely to continue.