The Paradox of “Takaichi-nomics,” an Expansionary Fiscal Gamble, Puts Japan’s Fiscal Sustainability to the Test

Soaring Approval Ratings Ahead of Snap Election
Expansionary Fiscal Push Without Clear Funding Plan
Markets Amplify Distrust Over “Fiscal Discipline Erosion”

With just three days remaining until the snap general election triggered by Prime Minister Sanae Takaichi’s dissolution of the House of Representatives last month, forecasts suggest the ruling Liberal Democratic Party (LDP) is on track to secure a result well beyond a simple majority. Riding a wave of soaring approval ratings built around an image of “strong leadership,” Takaichi has successfully consolidated conservative voters. Yet even as her political momentum accelerates, the bold expansionary fiscal pledges rolled out as election promises are already rattling Japan’s fiscal discipline. Some observers warn that a post-election “Takaichi shock” may not be out of the question.

A Growing Takaichi Surge, Conservative Voter Consolidation Pays Off

According to the Asahi Shimbun on the 5th, campaign events featuring Prime Minister Takaichi have drawn crowds of up to 3,000 people, underscoring the scale of the so-called “Takaichi surge.” When she took the stage at an LDP rally in front of Guki Station Square in Saitama Prefecture on the morning of that day, chants of “Ganbare” (“Hang in there”) erupted from the crowd. The enthusiasm continued into the afternoon at a rally in Kita-Urawa Park.

Buoyed by Takaichi’s popularity, projections now suggest the LDP could do more than secure a single-party majority of 233 seats, potentially achieving a landslide victory with its coalition partner, the Japan Innovation Party, by capturing a two-thirds supermajority of 310 seats. Should the ruling coalition exceed the two-thirds threshold in the House of Representatives, it would mark the emergence of a dominant governing bloc for the first time in 12 years, since the late Shinzo Abe administration in 2014. Such a configuration would allow the coalition to override rejections by the opposition-controlled House of Councillors through revotes in the lower chamber.

At the time Prime Minister Takaichi dissolved the lower house last month, political circles and public opinion were far from favorable. Some polls immediately after the dissolution showed cabinet approval ratings plunging by 10 percentage points, with negative assessments dominating public sentiment. The tide began to turn only after Takaichi embarked on an intensive nationwide campaign tour. Massive crowds gathered at each stop, and the electoral outlook gradually shifted in the LDP’s favor. Analysts point to her strategic emphasis on economic policy, rather than potentially divisive conservative agendas, as a decisive factor. Economic conditions remain the single most important criterion for voter judgment.

Policy Design Gaps, Including Funding Sources

Japan is currently experiencing inflation above the Bank of Japan’s target for a 45th consecutive month, while real wages declined year on year for 11 straight months throughout 2025. On an annual basis, real wages have fallen every year since 2022. Recent inflation readings stand at 2.1%, with annual price growth reaching 3.2%. A sharp mid-2025 spike in rice prices further intensified household burdens, weighing on the LDP’s electoral performance. The yen weakened sharply, approaching 160 per dollar in early 2026, significantly amplifying imported inflation pressures.

Against this backdrop, Prime Minister Takaichi unveiled a record-breaking budget of $783 billion for the fiscal year starting in April, alongside a $135 billion stimulus package introduced last year. An additional stimulus package aimed at easing cost-of-living pressures has also been prepared. Central to her campaign platform is a consumption tax cut: a pledge to reduce the tax rate on food products to zero for two years. Japan’s standard consumption tax rate is 10%, with a reduced 8% rate currently applied to food to mitigate regressive effects.

The core concern is fiscal deterioration driven by populist policies. Despite Japan’s government debt standing at roughly 240% of GDP, Takaichi continues to advocate large-scale fiscal expansion. The proposed fiscal 2026 budget totals approximately $1.145 trillion, a 6% increase from the previous year, with more than 25% allocated to debt redemption and interest payments. The proposed consumption tax cut alone would result in an annual revenue shortfall of about $46.7 billion. Given that total general-account tax revenue last year amounted to roughly $755 billion, this implies the evaporation of more than 6% of fiscal revenues. Additional policies further strain public finances. Existing measures, including gasoline tax cuts and free high school tuition, require an extra $20.6 billion in funding, yet only about $13 billion has been secured.

The LDP maintains that the shortfall can be addressed through non-tax revenues and the overhaul of special tax exemptions, without resorting to deficit-financed bond issuance. However, no concrete funding sources are specified in the pledges. Prime Minister Takaichi has repeatedly stated that fiscal gaps will be filled by trimming subsidies, scaling back preferential corporate tax treatments, and expanding non-tax revenues, but has yet to present a definitive plan. The burden on businesses stemming from the consumption tax cut also remains unclear. While exemption or zero-rating mechanisms are under discussion, Takaichi has only described the approach as “close to an exemption,” leaving ambiguity. A full exemption system could impose significant administrative and cash-flow burdens on small restaurants and farmers due to refund procedures.

‘Active Fiscal Policy’ Fears Trigger Historic Bond Yield Jolt

Experts increasingly expect the Japanese government to resort to additional bond issuance to cover funding gaps. A substantial portion of Japanese government bond issuance is dedicated to refinancing existing debt. Of the $1.69 trillion in bonds scheduled for issuance this year, approximately 75% will be rollover bonds. This implies that around $102.8 billion in new bonds could enter the market each month purely to refinance outstanding liabilities.

Financial markets are already flashing warning signals. As concerns mounted that Takaichi’s stimulus agenda could undermine fiscal sustainability, Japan’s 40-year government bond yield jumped nearly 6 basis points the day after the policy announcement, breaching the 4% threshold. The 20-year yield surged 9.5 basis points to 3.35%. Rising yields translate directly into higher interest burdens for the government.

Since the early 2000s, Japanese government bonds have served as a global anchor for ultra-low yields. Under the government and the Bank of Japan’s prolonged zero-interest-rate regime, long-term yields hovered in the 1–2% range for years. During the introduction of yield curve control and negative interest rates in 2016, the 40-year yield stood near 0.3%. Against that backdrop, the recent move into the 4% range is increasingly interpreted as a signal of structural change in Japan’s financial system. Markets now see a growing risk of further yield increases driven by fiscal anxiety. Until now, volatility has been largely confined to ultra-long maturities, but should it spread to shorter tenors such as 10-year bonds, the resulting strain on Japan’s economy could be far more severe.