Japan PM’s market woes deepen as support slides

Japanese Prime Minister Sanae Takaichi is facing mounting political and economic pressure as falling public support makes it harder for her government to balance tax cuts, economic stimulus and financial stability.

Takaichi’s approval rating fell sharply in July, reaching its lowest level since she became prime minister last year. Rising inflation has increased pressure on households and weakened public confidence in the government.

Higher import costs linked to a weaker yen have contributed to price increases. The impact of inflation is now becoming a major political challenge for Takaichi.

The prime minister has continued to support higher government spending and large-scale investment. She has also criticised excessive monetary and fiscal tightening.

However, investors are increasingly worried that the government’s expansionary policies could worsen Japan’s already difficult fiscal position.

Those concerns have pushed Japanese government bond yields higher. Rising yields indicate that investors are demanding greater returns to hold Japanese debt.

The market pressure has also complicated government efforts to support the yen. Officials have repeatedly warned currency traders against excessive speculation, but their comments have had limited impact.

Government sources said the effectiveness of such verbal intervention was weakening as investors became more concerned about Japan’s fiscal outlook.

One source warned that financial markets were gaining greater influence over fiscal management, creating a situation Japan had not experienced on this scale for decades.

Takaichi is caught between two competing objectives. She wants to stimulate economic growth and reduce the burden of rising living costs. At the same time, she needs to convince investors that Japan remains committed to fiscal discipline.

Her government’s spending plans have already contributed to market concerns. Japanese government bond yields climbed to their highest level in about three decades in July as investors assessed the potential impact of increased spending and borrowing.

Takaichi has acknowledged the importance of rebuilding confidence among investors. She recently said that communication with financial markets would become increasingly important.

However, she has shown little intention of abandoning her expansionary economic strategy.

The prime minister has reiterated her goal of ending what she calls excessive fiscal tightening. She wants to promote growth through increased investment and tax reductions.

That position has created a political dilemma.

Reducing or delaying her planned measures could weaken her popularity. But continuing with them could further unsettle financial markets.

The pressure could intensify in the coming months.

Takaichi is expected to proceed with a proposal to reduce an 8% consumption tax on food for two years. Japanese media have reported that the government intends to move ahead despite reservations within the ruling party.

The plan could provide relief to households struggling with higher prices. However, analysts say uncertainty over how the tax reduction would be financed could create additional pressure in the bond market.

The government is also considering changes to its budget-making process. Under the proposed system, spending requests for key growth sectors would not be subject to strict ceilings.

That could lead to higher government expenditure and increased debt issuance in the next fiscal year.

Economists have warned that such measures may make it more difficult for the government to reassure investors about its commitment to fiscal responsibility.

Japan’s currency is also facing significant pressure.