Japan's Debt Dilemma: Stimulus Fuels Market Fears

Japan's Prime Minister Sanae Takaichi has unveiled a significant $135 billion stimulus package, featuring energy subsidies and child cash handouts, to support the nation's economy. This move, however, has intensified concerns regarding Japan's already substantial national debt, which stands at more than double its economic output. The fiscal package relies heavily on bond markets to finance a substantial portion of its cost.

The increased government spending arrives amidst rising inflationary pressures and a recent surge in benchmark 10-year government bond yields, reaching their highest point in over 18 years. While some economists argue that fears of a fiscal crisis are exaggerated and that the spending is manageable in relative terms, others, including opposition parties, view these market movements as a stark warning against reckless fiscal policy, drawing parallels to the UK's 2022 fiscal instability.

Rating agencies like Fitch acknowledge Japan's large debt as a weakness, compounded by a subdued growth outlook and an aging population. The government's approach of using supplementary budgets outside of the standard fiscal cycle is also criticized for potentially undermining consolidation efforts and signaling a departure from fiscal prudence, despite arguments that responsible proactive policy can be maintained even with expanded initial budgets.