Japans Economic Plans Cause Global Market Jitters and Uncertainty

Japanese Prime Minister Sanae Takaichi has announced plans to suspend the country’s 8 percent consumption tax on food and non-alcoholic beverages for two years if her Liberal Democratic Party wins the upcoming snap elections. This pledge has caused market volatility in Japan and globally.

The Japanese government bond market has experienced significant fluctuations since Takaichi’s announcement, with yields on long-term bonds rising above 4 percent, a record high. Investors have been selling off their holdings of Japanese government debt, seeking higher interest payments for holding riskier debt.

Takaichi’s plan would result in an estimated revenue shortfall of 5 trillion yen ($31.71 billion) each year, according to Japanese government data. The shortfall could be made up by reviewing existing expenditures and tax breaks, but specific details have not been provided.

The announcement comes after Takaichi’s Cabinet approved Japan’s largest stimulus package since the COVID-19 pandemic, worth 21.3 trillion yen ($137 billion). The package included one-time cash handouts, subsidies for utility bills, and food coupons.

Japan’s long-term debt levels are among the highest in advanced economies, with a debt-to-GDP ratio exceeding 230 percent. This has raised concerns about the country’s fiscal sustainability.

The Bank of Japan (BOJ) has been scaling back bond purchases as part of its move away from decades of ultra-low interest rates. The sell-off in Japanese bonds has reverberated through global markets, with investors seeking higher returns for holding riskier debt.

Experts note that Takaichi’s plan is a significant development, and its impact on the market reflects broader concerns about fiscal sustainability in an era of large deficits in major economies such as the US.

Source: Al Jazeera