Japan's cabinet approves lavish stimulus as markets fret over Takaichi's fiscal policy

Japan’s new prime minister Sanae Takaichi’s cabinet approved a 21.3 trillion yen stimulus package—including 17.7 trillion yen in general account outlays (up from last year’s 13.9 trillion) and 2.7 trillion yen in tax cuts—marking the largest fiscal boost since the COVID era; markets have already reacted with the yen sliding to 10-month lows and super-long JGB yields hitting record highs amid worries over the country’s fiscal position. Takaichi said the plan will rely on higher-than-expected tax and non-tax revenues and, if needed, additional government bond issuance, which sources say will likely exceed last year’s 6.69 trillion yen of new issuance even though the government expects total bond issuance this fiscal year (initial plus supplementary) to be below last year’s post-supplementary 42.1 trillion yen. The cabinet aims to approve a supplementary budget as early as Nov. 28 and seek parliamentary approval by year-end, a timeline that keeps near-term pressure on FX and long-end rates and raises uncertainty about future fiscal trajectories and funding needs.

Analysis

Japan's new prime minister Sanae Takaichi secured cabinet approval for a 21.3 trillion yen stimulus package, comprising 17.7 trillion yen in general account outlays (up from last year's 13.9 trillion) and 2.7 trillion yen in tax cuts, the largest fiscal boost since the COVID era. Takaichi said funding will use higher-than-expected tax and non-tax revenue and, if needed, additional government bond issuance, while noting total bond issuance for the fiscal year (initial plus supplementary) is expected to be below last year's post-supplementary 42.1 trillion yen.

Markets have already reacted: the yen slid to 10-month lows and super-long JGB yields hit record highs, and sources expect additional bond issuance to exceed last year’s 6.69 trillion yen, creating near-term upward pressure on long-end yields and FX volatility. The cabinet aims to approve a supplementary budget as early as Nov. 28 with parliamentary approval by year-end, making funding-size announcements and parliamentary outcomes imminent market catalysts.

Implications include increased sovereign funding needs and a higher-for-longer yield environment for long-dated Japanese debt, sustaining FX stress that can affect cross-asset flows; investor focus should be on announced issuance size, timing of the supplementary budget, and whether revenue assumptions materialize into lower-than-expected bond supply or further issuance.

Key Decisions for Investors

• Reduce or hedge duration exposure to super-long JGBs until the government finalises the additional bond issuance size and markets reprice risk
• Implement JPY hedges or reduce unhedged yen exposure given the currency's slide to 10-month lows and elevated near-term FX volatility
• Monitor the supplementary budget approval timeline (target Nov. 28 and year-end parliamentary vote) and the announced issuance amount relative to last year's 6.69 trillion yen as primary catalysts for rates and FX
• Consider selective exposure to Japan equities with export sensitivity only with explicit currency-hedging or after clarity on issuance and yield direction, as weaker yen can be a tailwind but volatility remains high