Japan’s Prime Minister Sanae Takaichi is preparing to announce an extra budget aimed squarely at the rising commodity prices fueled by ongoing Middle East conflict. The move fits neatly into a fiscal playbook she’s been running since day one in office: spend big, worry about the tab later.
The spending blueprint
Takaichi has already introduced a stimulus package worth approximately $112B since taking office. That money has been directed at price relief through subsidies, cash support for households, and regional economic aid.
Now she’s going back for more. The extra budget targets commodity price pressures specifically, the kind of supply-side inflation that monetary policy alone can’t fix.
Her broader economic agenda includes a proposed two-year suspension of the 8% consumption tax on food. That kind of tax holiday sounds great at the kitchen table. At the finance ministry, the math gets uncomfortable fast.
Takaichi has framed all of this as “responsible and proactive” fiscal expansion.
Bond markets are already reacting
Long-term JGB yields have climbed from roughly 1.1% to about 2.2%, a near-doubling driven by concerns over fiscal stability and the prospect of even more stimulus spending.
Analysts expect Japan’s budget deficit to surge to approximately 6% of GDP by fiscal year 2026 under the current trajectory. Japan already carries the highest debt-to-GDP ratio among major developed economies.
Meanwhile, inflation in Japan continues to exceed the Bank of Japan’s 2% target. The BOJ finds itself in an awkward position: the government is stepping on the fiscal gas pedal while the central bank is supposed to be tapping the brakes.
What this means for crypto and risk assets
The yen carry trade, where investors borrow in low-yielding yen to invest in higher-yielding assets elsewhere, has been one of the most influential forces in global markets for years. Rising JGB yields complicate that trade, but if fiscal expansion weakens the yen faster than yields can rise to compensate, the carry trade dynamic could push more capital toward risk assets, including crypto.
The more immediate risk for investors is the potential for a disorderly bond market reaction. If JGB yields continue climbing rapidly, it could trigger cross-asset deleveraging that hits crypto especially hard. The July 2024 yen unwind showed exactly how quickly Japanese monetary dynamics can cascade into crypto sell-offs.
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