Japan: High Debt, Weak Yen, Endless Stimulus
Beneath the superhero pose is a ¥21.3 trillion package where minority politics, chip nationalism and cash handouts try to do the job monetary policy can’t.
Prime Minister Takaichi just bet the house on borrowed money, and the bond market is already backing away from the table.
TL;DR: On November 21, 2025, Japan’s cabinet approved a ¥21.3 trillion stimulus package, the largest since the pandemic. The package marks Japan’s drift into fiscal dominance, where debt constraints override monetary policy. Bond yields are spiking, the yen is collapsing, and markets are pricing in a fiscal risk premium that was dormant for decades.
Tokyo just rolled the biggest economic dice since the pandemic, and the bond market answered with a punch to the face.
On November 21, Prime Minister Sanae Takaichi’s cabinet signed off on a ¥21.3 trillion stimulus package that doesn’t simply bend Japan’s fiscal rules. It grinds them into dust.
The old Liberal Democratic Party, with its ritual bows to fiscal prudence, is gone. The Ministry of Finance, long treated as a secular priesthood of budgetary restraint, just got flattened.
The yen sank to a 10-month low. The 30-year JGB yield jumped to 3.4 percent, highest since 2011. The Nikkei dropped on approval day. Goldman Sachs started talking about a returning fiscal risk premium.
The infamous Widow Maker trade is finally spitting out real money instead of hedge fund obituaries.
This entire package sits on the political corpse of Shigeru Ishiba.
Ishiba took office in October 2024 with the energy of a filing cabinet. His administration drowned almost immediately in slush fund scandals, the sort of grubby corruption that actually angers Japanese voters.
Then came the general election in late 2025. The LDP-Komeito coalition lost its Lower House majority for the first time in 15 years. Bloodbath is not hyperbole.
Ishiba quit in September: I have made the painful decision to step down despite still having unfinished tasks. Political roadkill.
Into that wreckage walked Sanae Takaichi.
Abe loyalist. Hawk on China. Champion of Sanaenomics, essentially Abenomics with less inhibition and more adrenaline. She won the LDP presidential contest in October and became Japan’s first female prime minister. Markets framed it as the return of reflation. Critics called it recklessness.
One key problem: no majority.
To pass this budget, Takaichi needed the Democratic Party for the People and the Japan Innovation Party. Opposition parties behaved like mercenaries, and mercenaries bill at a premium.
The original size was around ¥17 trillion. The DPP wanted the tax wall revised, cheap gasoline, more cash. Takaichi needed their votes, so the package swelled to ¥21.3 trillion. Mizuho Research put it diplomatically: the government had to factor in opposition parties’ cooperation.
Translation: legislative survival bought with taxpayer money.
Fragmented politics means fiscal discipline turns into a luxury item. Each budget becomes a ransom note.
By late 2025, Japan sat in a stagflationary chokehold.
Core inflation ran above the Bank of Japan’s target for 43 straight months. In October, core CPI hit 3 percent, comfortably ahead of wage growth. Energy costs climbed. Gas bills hurt.
Then GDP rolled over. The economy shrank in Q3, first contraction in a year and a half. Private consumption sagged. Exports to the US fell for the seventh month running.
Faced with that, any prime minister could see the trap: do nothing and a technical recession arrives in early 2026, accompanied by a political execution. The stimulus is less a grand strategy than a survival reflex.
About ¥11.7 trillion targets the household cost-of-living crunch. Utility subsidies will push down electricity and gas bills from January to March. Households see maybe ¥7,000 off over three months. The goal: shave about 0.7 percentage points off headline CPI and buy the Bank of Japan some breathing room.
Low-income households receive ¥30,000 in fresh handouts, on top of an earlier ¥70,000. Families with children see a separate ¥20,000 per child.
More consequential: the commitment to raise the 1.03 million yen income tax wall. That threshold has quietly punished part-time workers for decades. About ¥1.2 trillion is earmarked to revise it, allowing people to work more hours without getting hammered by the tax code.
Then comes the ideological core.
About ¥7.2 trillion targets sectors branded critical for survival. This is where the stimulus becomes less about smoothing consumption and more about national resilience.
At the center sits Rapidus Corporation, a state-backed upstart aiming to mass-produce 2-nanometer chips in Hokkaido by 2027. It receives upward of ¥1 trillion in capital and subsidies. This isn’t being sold as corporate welfare. It’s framed as economic nationalism. The Ministry of Economy sees semiconductor capacity as a national security shield, a way to reduce dependency on Taiwan’s TSMC while cross-strait tensions keep climbing.
AI infrastructure gets its own pot of cash. Sakura Internet and KDDI receive support to buy GPUs and build domestic AI data centers. The mission: train Large Language Models inside Japan, keep data onshore, trade some efficiency for sovereignty.
Defense spending soaks up around ¥1.7 trillion. Long-range missiles, hardened bases, steps toward lifting defense expenditure to 2 percent of GDP, all packaged as economic stimulus.
Time to deal with the elephant: Rapidus.
The Japanese state is betting over ¥1 trillion on a firm trying to vault from older-node production to 2-nanometer technology in one jump. Past experience in the chip world does not reward that sort of leap. Intel tried. It bled years and credibility. Samsung operates at a scale Rapidus can barely sketch on a whiteboard.
Even if Rapidus hits its technical milestones, a separate question looms: who buys the chips, at what volume, at what price?
That kind of money creates a too big to fail marriage between state and firm. Any stumble means taxpayers will fund follow-on bailouts. The label won’t matter. The bill will.
This is less neat industrial policy than a very expensive spin of the wheel.
Climate policy gets tangled in similar contradictions. Japan has pledged ¥20 trillion in Green Transformation bonds to decarbonize. Yet this stimulus splashes close to ¥1.5 trillion on subsidies that keep fossil fuel prices artificially low.
Call it brown stimulus: short-term political calm purchased at the expense of long-term climate goals.
The market is reading all this with clenched teeth.
The financing relies heavily on new JGB issuance when public debt already sits north of 260 percent of GDP. For years, the Widow Maker trade humbled anyone shorting JGBs. The Bank of Japan hoovered up supply, and gravity never quite arrived.
That suspension looks over.
The 30-year yield at 3.4 percent and the 10-year around 1.8 percent point to bear steepening. Investors are demanding a higher term premium, compensation for the risk that gargantuan issuance collides with finite central bank appetite.
Goldman talks openly again about a fiscal risk premium on Japanese assets. Pricing of JGBs is no longer just about inflation and growth. It’s about the fear that Tokyo has lost the habit of saying no.
Inside Tokyo, the Ministry of Finance fought for a smaller, more targeted program. That fight ended in defeat. Political survival mattered more than technocratic discomfort.
The currency tells its own story.
After the announcement, the yen slid past ¥157 per dollar, a new 10-month low.
A gigantic fiscal expansion in a country with towering debt implies the central bank must stay cautious on rate hikes to avoid detonating debt service costs. The US, meanwhile, keeps rates relatively high. Carry traders borrow in yen, buy dollars, sit on the spread. Each iteration pushes the yen weaker.
That weaker yen amplifies imported energy and food costs. So the government pours money into utility subsidies and cash handouts to ease the pain, while the currency move quietly claws back those benefits in the background.
Fiscal whack-a-mole in real time.
Layer on the Trump problem and the picture gets more twisted.
Part of this stimulus is explicitly insurance against the possible return of Trump and higher US tariffs. Yet a cheaper yen inflates Japan’s bilateral trade surplus with the US in dollar terms. The optics in Washington look worse, not better. Japan could end up appearing as an even bigger offender in Trump’s mercantilist worldview, increasing the odds of exactly the punishment this package is meant to hedge against.
Relations with China are already chilled. Takaichi has taken a harder line on Taiwan and security. Beijing responded with travel advisories, informal pressure, restrictions on Japanese seafood.
Parts of the stimulus double as compensation for sectors squeezed by that economic pressure. For this cabinet, fiscal policy isn’t just about growth. It’s a toolkit for economic warfare.
Japan has drifted into fiscal dominance. The stock of public debt now constrains monetary policy more than any inflation model. Significant rate hikes would blast a hole in the budget, so rate hikes are constrained long before formal targets say they should be.
Bond vigilantes, long thought extinct in Japan, are breathing again.
Near term, this stimulus probably prevents a winter 2026 recession. Cash transfers, cheaper utility bills, sectoral support will put a floor under consumption.
The second-order consequences look nastier.
Heavier JGB issuance in a more skeptical market means higher yields, more mark-to-market pain for regional banks, rising balance sheet stress for the Bank of Japan itself. Currency weakness acts as a stealth tax, steadily eroding real incomes.
So the race is on.
Can Japan muscle its way into a higher-growth, higher-productivity equilibrium fast enough to make the debt bearable? Can Rapidus actually deliver viable 2-nanometer chips before investor patience with fiscal adventurism runs out? Can Takaichi hold together a fragile coalition once the initial sugar high fades?
The Ministry of Finance once had the authority to slam the brakes. That chapter is closed.
Fragmented politics now make sustained fiscal restraint nearly impossible. Budgets will consistently be padded to secure votes. Opposition parties will keep extracting their price. Debt will rise faster than planners pretend.
Somewhere, an old macro trader who once blew up shorting JGBs is looking at the new yield curve and feeling an unpleasant, vindictive satisfaction.