Japan's government, led by Prime Minister Sanae Takaichi, is increasing fiscal spending to revive economic growth and establish a virtuous cycle. However, economists from a key government advisory panel emphasized on Thursday that maintaining market trust in Japan's fiscal health remains critical, especially amid volatile conditions where stabilizing debt and the yen should take priority.

The Japanese economy unexpectedly contracted in Q3, while inflation remains elevated at around 3%, primarily driven by rising food prices. In a formal proposal submitted to the government, the economists stated, "The government must implement necessary and sufficient fiscal stimulus measures while continuing investments in crisis management and growth sectors."

The proposal stressed that ensuring the sustainability of long-term fiscal spending and market confidence in Japan’s fiscal system is paramount—potentially through cutting wasteful expenditures. Beyond steadily reducing Japan’s debt-to-GDP ratio, the new cabinet must also employ diverse policy tools while "consistently monitoring interest rates, bond yields, exchange rates, and stock market trends."

Recently, expectations of Takaichi’s large-scale fiscal stimulus have weakened long-term government bonds (10+ years) and the yen, as markets anticipate increased sovereign debt issuance and prolonged inflation. The proposal, co-authored by four private-sector experts—including former Bank of Japan Deputy Governor Masazumi Wakatabe and reflation advocate Toshihiro Nagahama—will be reviewed by the government’s economic and fiscal advisory council, which oversees Japan’s fiscal blueprint and long-term policies.

Takaichi, a conservative nationalist who cites Margaret Thatcher as an influence, is a longtime ally of the late Shinzo Abe and a staunch supporter of his economic policies. This has fueled market speculation about a revival of "Abenomics"—combining aggressive fiscal easing with cautious monetary tightening.

The so-called "Takaichi Trade" reflects market bets on her policies triggering volatility in stocks, bonds, and currencies. However, the yen and Japanese bonds may face prolonged declines if her stimulus plans materialize. Recent political developments suggest her coalition will secure a majority in the lower house, reinforcing expectations of expanded fiscal spending and debt issuance—a bearish signal for bonds and the yen.

Long-term Japanese bonds (10+ years) could enter a phase of surging yields (and falling prices), potentially destabilizing global financial markets.