By William Pesek

   About the author:  William Pesek   is a longtime Asia opinion writer, based in Tokyo. He is a former columnist for Barron's and Bloomberg and the author of Japanization: What the World Can Learn from Japan's Lost Decades . 

The moment Sanae Takaichi had probably been dreading most in her three months as Japan's prime minister has arrived: President Donald Trump's White House is suddenly wise to her yen-depreciation gambit. And it isn't happy.

The yen sharply depreciated last week as investors expressed concerns about Takaishi's economic agenda. The $7.3 trillion Japanese government bond market gyrated wildly, and U.S. Treasury yields spiked in response.

Takaichi's economic team is getting quite the earful from the U.S. Treasury Secretary Scott Bessent signaled last week that Washington's patience with Tokyo's beggar-thy-neighbor tactics -- and their effects on rising global bond yields -- is wearing thin. Bessent told Fox News it is "very hard to disaggregate the market reaction from what's going on endogenously in Japan."

Bank of Japan governor Kazuo Ueda quickly took the hint, pledging to work with Tokyo's Ministry of Finance on emergency bond-buying operations. On Friday, markets buzzed with talk that Japanese Finance Minister Satsuki Katayama's team -- and Bessent's, too -- were doing rate checks. It's a telltale sign of intervention to come. The yen surged nearly 3%.

Yet the damage is already done, on two levels. One is that Takaichi's entire economic strategy of stimulus through tax cuts and increased government spending was just confirmed to be unworkable by the so-called bond vigilantes.

Takaichi called a snap election for Feb. 8 so she can win a public mandate to do what bond traders are warning her against: Reopen the fiscal floodgates and pressure the BOJ to abandon efforts to get interest rates as far away from zero as possible.

Talk of tax cuts is a nonstarter for the bond bears. Investors are discovering the precariousness of Tokyo's debt. Its debt-gross-domestic-product ratio is, depending on whom you ask, between 230% and 260%. That burden might be less troubling if Japan's population weren't shrinking and aging so rapidly. In 2025, Japan saw the lowest number of births since it began keeping records in 1899 and the highest debt-servicing costs ever. Not a great combo.

Enter Takaichi. She is pledging aggressive fiscal and monetary loosening. Both while campaigning and in office, Takaichi has said little about cutting bureaucracy, modernizing labor markets, rekindling innovation, increasing productivity, or narrowing the gender-pay gap.

Instead, "Sanaenomics" is almost linearly focused on ultralow rates, a weaker yen to boost exports, and giant stimulus packages to juice domestic growth.

This gets us to Japan's second problem: Trump. As he made abundantly clear in his second term, Trump is an easy money guy. He and his team have talked about a desire to devalue the dollar through a Mar-a-Lago accord to rival the deal to weaken the dollar struck at New York's Plaza Hotel in 1985.

Trump's threats to fire or indict Federal Reserve Chair Jerome Powell, to cajole him into monetary submission, are, in part, about engineering a weaker dollar. The same is true in his attempt to ax Fed governor Lisa Cook and presumably replace her with a monetary sycophant.

Any sense in Trump World that Japan is working to out-devalue the U.S. could backfire on Takaichi. Just this week, South Korea learned that with Trump, trade deals are never quite final. Trump said he will increase tariffs on Korea from 15% to 25% for "not living up" to their trade deal reached last year. What he really means is that Korea isn't yet coming up with the $350 billion the White House demanded in return for a lower tariff rate.

Trump shook down Japan in July for an even more outlandish "signing bonus" of $550 billion. He surely knows Japan hasn't shipped that chunk of cash his way. No doubt, Takaichi is anxious Japan will soon join Korea in the 25% tariff club.

Japan is hardly in a position to withstand new Trump trade penalties. Geopolitical crises are adding up almost too quickly to count, and Trump's fights with Fed leadership and corporate America could further unnerve world markets.

That's exactly what Japan doesn't need. Takaichi's fiscal loosening plans already have markets buzzing about a "Liz Truss moment." In recent weeks, 10-year Japanese bond yields have risen to their highest levels since 1999.

There are many reasons why JGBs haven't crashed, despite years of dire prognostications. At least 90% of outstanding JGBs are held domestically, of which the BOJ owns more than half. Official rates are a negligible 0.75%, and pretty much every entity in Japan has sizable JGB holdings, meaning the risks of selling are limited. That is why when Takaichi's predecessor, Shigeru Ishiba, said in May that Tokyo's situation is "worse than Greece," he was only half right.

Still, there are clear transmission lanes for Japan to spread its market tremors -- particularly via the yen-carry trade. After 26 years of rates at or near zero, Japan is the top creditor nation. Now, funds and investors who had borrowed cheaply in yen to bet on higher-yielding assets around the globe are potentially in harm's way, should the yen skyrocket.

The thing is, a titanically large debt isn't a problem -- until suddenly it is. In the age of Trump and Xi, who can say what actions in Washington or Beijing might push Japan into the financial danger zone?

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January 27, 2026 15:14 ET (20:14 GMT)

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