{"id":338228,"date":"2025-12-10T00:00:09","date_gmt":"2025-12-10T00:00:09","guid":{"rendered":"https:\/\/www.newsbeep.com\/au\/338228\/"},"modified":"2025-12-10T00:00:09","modified_gmt":"2025-12-10T00:00:09","slug":"why-japans-economic-woes-spark-global-market-concern-dw-12-08-2025","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/au\/338228\/","title":{"rendered":"Why Japan’s economic woes spark global market concern \u2013 DW \u2013 12\/08\/2025"},"content":{"rendered":"

Stimulating economic growth while tackling the rising cost of living<\/a> has\u00a0been high on the agenda of Japanese Prime Minister Sanae Takaichi<\/a> since taking office in October.<\/a>\u00a0<\/p>\n

Takaichi, 64, wants to avoid the fate of her predecessor, Shigeru Ishiba, who was in power barely a year before he was pushed out amid widespread public discontent over stubborn inflation<\/a>, among other issues.<\/p>\n

An admirer\u00a0of former premier Shinzo Abe<\/a>, Takaichi has vowed to pursue her mentor’s “Abenomics”<\/a>\u2014 a set of policies that involved ultra-loose monetary policy, fiscal stimulus and structural reforms to get Japan<\/a> out of its decades-long deflationary spiral of falling prices and weak consumer spending.<\/p>\n

\"JapaneseTakaichi is seeking to jumpstart economic growth by providing financial help to households and boosting defense spendingImage: Kim Kyung-Hoon\/Getty Images<\/p>\n

Japan’s economy, the world’s fourth largest, contracted in the third quarter, adding to pressure on Takaichi.\u00a0<\/p>\n

Her administration unveiled a big spending spree last month to boost growth and help Japanese families. The package, worth $135 billion (\u20ac116 billion), includes cash handouts to parents and energy subsidies.<\/p>\n

Can the stimulus accelerate growth in Japan?<\/p>\n

Werner Pascha, a Japan expert and professor emeritus at the University of Duisburg-Essen’s Institute of East Asian Studies, believes\u00a0the stimulus won’t\u00a0significantly foster economic expansion.<\/p>\n

“First, additional demand means that there will be more inflationary pressure, possibly already in the short term, but at least in the medium term,” he told DW. “Second, it is questionable whether the government can really increase effective expenses so fast as it would like to. In the past, it could not.”<\/p>\n

Could Japanese rice turn from staple to luxury?<\/p>\n

To view this video please enable JavaScript, and consider upgrading to a web browser that supports HTML5 video<\/a><\/p>\n

Margarita Estevez-Abe, an expert on Japan at Syracuse University’s Maxwell School, also thinks most of the items on Takaichi’s budget will do little to accelerate growth.<\/p>\n

She said Takaichi would promise\u00a0investments in a long list of key sectors such as AI, semiconductor, bio-tech, space, shipping\u00a0and aerospace. “But this looks like a wish list rather than a serious strategic plan.”\u00a0<\/p>\n

Estevez-Abe argues\u00a0more spending “is the wrong cure” for Japan’s woes, which she said were\u00a0the\u00a0result of “structural challenges” such as an aging and shrinking population<\/a>, inadequate investment in public education and misallocation of capital to inefficient sectors.<\/p>\n

“I don’t think Takaichi’s budget, or anything she has stated so far, addresses any of the core underlying factors,” she said.<\/p>\n

Japan’s public finances in bad shape<\/p>\n

The premier’s expansive spending plans, however, risk further straining public finances.<\/a><\/p>\n

Japan already has the highest debt load among advanced economies, at about 250% of its total economic output, or gross domestic product (GDP)<\/p>\n

But it has so far avoided a borrowing crisis, largely due to the structure of its debt.<\/p>\n

All government bonds are denominated in the Japanese currency, yen, and over 90% of them are being held by Japanese institutions, including more than half by the central bank.<\/p>\n

While the Japanese government is highly indebted, the economy as a whole is “rich,” says\u00a0Franz Waldenberger, director of the German Institute for Japanese Studies, adding that\u00a0Japan’s share of net foreign assets as percentage of GDP is “among the highest in the world.”<\/p>\n

“I call it ‘rich country, poor government,'” he told DW.<\/p>\n

Japan’s military build-up hampered by lack of recruits <\/p>\n

To view this video please enable JavaScript, and consider upgrading to a web browser that supports HTML5 video<\/a><\/p>\n

Rising yields and stubborn inflation<\/p>\n

Nevertheless, the sluggish economy<\/a> and the latest spending spree have increased the cost of debt, with the interest charged by investors to hold Japanese government bonds climbing in recent months.<\/p>\n

Yields on Japan’s 10-year government bonds\u00a0\u2014 the total annual return an investor expects from a bond and fluctuating\u00a0inversely with the bond’s price \u2014 jumped last week to 1.92% \u2014 their highest level in nearly two decades.<\/p>\n

“Japan’s bond market is teetering on the edge of a self-inflicted wound,” Alicia Garcia-Herrero,\u00a0chief economist for Asia-Pacific at French investment bank Natixis, told DW. She said Tokyo’s “reckless spending spree” is “like watching a gambler double down on a losing hand.”<\/p>\n

Inflation, meanwhile, has remained consistently above the central bank’s 2% target.<\/p>\n

The resource-poor country depends heavily on foreign food, energy and raw materials to power its economy. And a weak yen is contributing to price pressures by making imports more expensive.<\/p>\n

“Inflation will only come down when the yen strengthens, but this requires a rate hike, which negatively impacts the government’s ability to borrow,” said Estevez-Abe, who sees\u00a0Takaichi’s plan\u00a0as a no-win situation.\u00a0<\/p>\n

The Bank of Japan last raised its policy rate from 0.25% to 0.5% in\u00a0January\u00a0but has since left it unchanged. And there’s speculation that the central bank is preparing to hike rates at its upcoming meeting on December 18-19.<\/p>\n

Fears of ‘carry trade’ unwind<\/p>\n

The combination of higher interest rates and better yields on Japanese government bonds has sparked concern in financial markets as to how it will impact the so-called carry trade.<\/p>\n

For decades, global carry-trade investors\u00a0have taken out low-cost loans in Japanese yen and used the borrowed money to buy higher-yielding assets abroad, such as US equities and Treasury bonds.<\/p>\n

The practice works as long as interest rates in Japan remain low and the yen is weak.<\/a><\/p>\n

But if Japanese interest rates and bond yields rise, and the yen strengthens, the carry trade might unwind, potentially triggering market turbulence and hitting asset valuations worldwide, particularly those of risky assets like cryptocurrencies<\/a> and tech stocks<\/a>.<\/p>\n

“This mess is supercharging fears of a yen carry trade implosion, that $20 trillion global Ponzi scheme where cheap yen loans fuel everything from Wall Street tech bubbles to emerging market excesses,” said Garcia-Herrero.<\/p>\n

Even though the odds of this turning into a massive financial crisis like the one in 2008\/09 are low,\u00a0she said it could hit the markets hard by “shredding equities by 5-12% and jacking up bond yields 20-40 basis points.”<\/p>\n

Pascha described the yen carry trade as a “rather perverse macroeconomic phenomenon,” explaining that it has contributed to “the exuberance with respect to bitcoin<\/a> and, arguably, the extreme valuation of high-tech and AI stocks,” among other problems.<\/p>\n

From that perspective, Pascha underlined, “it is even to be welcomed that eventually there are forces for the yen carry trade to be reduced or even to be reversed.”<\/p>\n

Nevertheless, there is a danger that “markets could destabilize and spiral out of control, if financial flows change too abruptly,” he warned, adding that “a purely financial phenomenon like the unwinding of the carry trade will be less harmful” for the markets than a serious real-world event like an intensifying US-China trade war<\/a> or a new pandemic.<\/p>\n

Edited by: Uwe Hessler<\/p>\n","protected":false},"excerpt":{"rendered":"Stimulating economic growth while tackling the rising cost of living has\u00a0been high on the agenda of Japanese Prime…\n","protected":false},"author":2,"featured_media":338229,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[64,63,99,164],"class_list":{"0":"post-338228","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-au","9":"tag-australia","10":"tag-business","11":"tag-economy"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/338228","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=338228"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/338228\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/338229"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=338228"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=338228"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=338228"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}