Speaking this month at an international finance conference in Tokyo, Prime Minister Sanae Takaichi of Japan used an unusual turn of phrase to sell the assembled crowd on her plan to revive the economy.<\/p>\n
\u201cJust shut your mouths and invest everything in me,\u201d Ms. Takaichi declared, quoting a line from the popular manga series \u201cAttack on Titan\u201d \u2014 a reference that several in the room admitted was lost on them. \u201cJapan is back. Invest in Japan,\u201d she continued.<\/p>\n
Ms. Takaichi\u2019s promise to the group was that she would bolster Japan\u2019s economy through government spending, but only in a way that was \u201csustainable\u201d and \u201cresponsible.\u201d The spending would be enough to drum up growth but keep Japan\u2019s already enormous debt levels<\/a> manageable, she said.<\/p>\n The prime minister\u2019s ability to balance these dual pledges is about to be put to the test.<\/p>\n On Friday, the Bank of Japan increased its benchmark interest rate to 0.75 percent. While this remains far below rates in other major economies, it is the highest level in Japan \u2014 which for decades has used near-zero rates to battle deflation \u2014 since 1995. More rate increases are expected in the coming years.<\/p>\n The central bank\u2019s decision to raise rates means the cost of servicing Japan\u2019s public debt, the highest in the developed world, will become higher. Ms. Takaichi\u2019s government just pushed through a $117 billion stimulus package, which includes items like subsidies for households, more money for Japan\u2019s military, and investments in the semiconductor and shipbuilding industries.<\/p>\n More than half of that spending will be funded by issuing more bonds.<\/p>\n Most economists believe that Ms. Takaichi\u2019s spending package will help put a floor under growth for Japan\u2019s economy next year, helping to offset lingering negative impacts from U.S. tariffs. The higher levies on exports led Japan\u2019s economy to contract<\/a>, for the first time in more than a year, in the July-to-September quarter.<\/p>\n BMI, a unit of the research and analytics provider Fitch Solutions, called Ms. Takaichi\u2019s spending plan a \u201cgenerous fiscal package\u201d and projected that it would stimulate both private consumption and fixed investment. As a result of the stimulus, BMI raised its 2026 G.D.P. growth forecast to 1.4 percent from 0.7 percent.<\/p>\n Still, in financial markets, growing concerns that Ms. Takaichi\u2019s expansionary policies will worsen Japan\u2019s precarious fiscal health \u2014 public debt is more than twice the size of Japan\u2019s economy \u2014 have triggered a sell-off in government bonds. This has pushed long-term yields on the bonds to their highest level in nearly two decades.<\/p>\n The volatile mix of growing debt, higher interest rates, aggressive fiscal spending and tariffs make the path forward for Japan\u2019s economy difficult to predict, according to George Goncalves, a head strategist at the Japanese bank MUFG.<\/p>\n \u201cCompeting forces are generating uncertainty,\u201d he said, adding that historically, when only one lever of policy was changed, \u201cit was much clearer to understand the implications.\u201d<\/p>\n The primary concern rests on whether Tokyo\u2019s fiscal ambitions can coexist with a sustainable management of debt loads, Mr. Goncalves said. \u201cThe saving grace for Japan is that they have had rates near zero \u2014 or even negative \u2014 forever.\u201d<\/p>\n This is one reason Ms. Takaichi has traditionally championed easy monetary policy.<\/p>\n