Since July, the USD/JPY exchange rate has repeatedly tested the 164 yen level, pushing the yen to its lowest point in nearly 40 years. The market has dubbed this sustained yen weakness as the "Takaichi Yen Depreciation." Although Japanese Prime Minister Shigeru Ishiba has personally and vehemently denied this, the hard facts remain unchanged by his individual rhetoric.

The Takaichi fiscal policy route has become a new source of pressure on the yen. Since the formation of the Takaichi cabinet, the yen has demonstrated a persistent downtrend, even being labeled by some international institutions as the "world's weakest currency." It is noteworthy that the primary factors that previously caused the yen to depreciate have all weakened to some degree: the US-Japan interest rate differential has narrowed as the Bank of Japan (BOJ) gradually raises rates; Japan's trade deficit has shrunk from 19.97 trillion yen in 2022 to 2.65 trillion yen in 2025, with several monthly data points since February even showing a trade surplus; and Japan's "digital deficit" is no longer a major issue.

Consequently, the real reason the market has lost confidence in the Japanese economy is precisely the Takaichi administration's fiscal expansionary route. At the end of June, the Japanese government's release of the draft "Basic Policy on Economic and Fiscal Management and Reform" (the "Honebuto Policy") caused a significant shock, with Japan's long-term interest rate briefly touching 2.9% and the yen weakening further.

The Takaichi fiscal policy is fundamentally at odds with the goal of Japan's financial normalization. In March 2024, the BOJ announced the end of its massive monetary easing program, signaling a move toward financial normalization. However, in practice, the BOJ's measures have been cautious, extending the unconventional monetary policy, originally planned for just two years, to 11 years, which has brought significant side effects and risks. Taking the fiscal situation as an example, due to Japan's long-term policy of low or even negative interest rates, the government's attitude toward fiscal discipline has become lax, with ever-expanding budgets leading to an extremely high government debt. As of the end of fiscal year 2025, Japan's government debt exceeded 1,343 trillion yen, equivalent to a burden of about 10.9 million yen per person. Japan's government debt-to-GDP ratio stands at 229%, the highest in the G7, far surpassing Italy's 136% in second place.

Clearly, to achieve financial normalization, Japan must strengthen fiscal discipline, improve fiscal efficiency, and implement an austerity policy. But the Takaichi cabinet has gone in the opposite direction, designating fiscal year 2027 as the "first year of responsible active fiscal policy," emphasizing state-led subsidies to boost supply capacity in growth sectors. In April, it passed a record 122.3 trillion yen general account budget, and in July, it established a massive investment plan totaling 370 trillion yen by 2040.

Japan's economic credibility is being severely impacted by the Takaichi fiscal policy route. Atsushi Takeda, chief economist at Itochu Research Institute, pointed out, "Maintaining a loose monetary environment while pursuing an active fiscal policy will lead to a decline in market trust in the currency's creditworthiness and gradually evolve into a trend of 'selling Japanese assets.'" US Treasury Secretary Janet Yellen has also repeatedly criticized the Takaichi government's overly loose fiscal thinking. During the Japanese general election in January, the Liberal Democratic Party included "tax cuts" in its platform, pushing long-term interest rates higher. Yellen had a stern exchange with Japanese Finance Minister Satsuki Katayama over this, forcing Katayama to explain that Japan "will not rely on deficit-covering bonds."

Internationally, there are numerous examples of governments failing due to neglecting fiscal balance and fiscal discipline, such as the Truss government in the UK in 2022, which collapsed in less than two months after pushing through a massive tax cut plan without regard for the fiscal situation.

The market has already sounded the alarm for the stubbornly pursued Takaichi fiscal expansion route. Japan's long-term interest rate, based on the 10-year government bond, has surged from 1.6% at the start of the Takaichi government to 2.8%, the highest level in 30 years. Since the implementation of easing policies in 2013, successive Japanese governments have focused on stock prices and exchange rates, paying little attention to interest rates. However, Japan has now returned to a "with interest rates" environment for two years, and the massive government debt forces the administration to focus on interest rate issues. It can be said that Japan has entered an era of "interest rate politics." For example, in the fiscal year 2026 general account budget, debt service costs have jumped to 31.3 trillion yen, exceeding the 30 trillion yen mark for the first time.

Clearly, a struggle has begun. Even if Takaichi can control the Japanese government and the Liberal Democratic Party, he likely cannot control the entire global market.