Japan’s Prime Minister Sanae Takaichi has unveiled an ambitious investment plan aiming to inject 370 trillion yen (£1.7 trillion) into 17 industrial sectors by 2040. The proposal, part of the government’s "big-boned policy" (Honebuto no Hoshin) scheme, seeks to more than double the country’s economic growth to over 1% annually and reduce Japan’s dependence on trade with China. However, the plan has sparked concerns among investors and policymakers over its scale, funding, and potential risks to Japan’s financial stability.
Takaichi’s initiative marks a significant shift from the traditionally cautious fiscal policies of previous administrations. The government intends to focus on cutting-edge sectors including artificial intelligence, semiconductors, biotechnology, defense, and energy. Emphasizing “physical artificial intelligence” — a blend of AI and advanced manufacturing — Tokyo aims to maintain its technological edge amid intensifying competition from China, South Korea, and other global players.
The proposal arrives against a backdrop of longstanding economic challenges in Japan. Since the bursting of the property bubble in the early 1990s, the country’s economy has experienced periods of stagnation. The 2008 global financial crisis and demographic shifts, such as a rapidly aging population, have further constrained growth. Japan’s debt-to-GDP ratio swelled to 260% by 2020 before modest improvements brought it down to around 230% in 2025. Nonetheless, debt levels remain among the highest in the world.
Financial markets have reacted with caution to Takaichi’s spending plans, which call for rewriting long-standing budget rules and involve substantial unfunded expenditures. Investors have questioned where the government intends to source the additional funding, drawing parallels to the market turmoil triggered by UK Prime Minister Liz Truss’s brief premiership in 2022, which was marked by controversial unfunded tax cuts. The lack of clear fiscal measures has contributed to a selloff in Japanese equities, with major firms such as Sony and Toyota Motor Corporation experiencing declines amid uncertainty and growing competition.
Japanese government bond yields have risen to 2.8%, a 29-year high, reflecting mounting concerns over fiscal sustainability. Meanwhile, the yen has depreciated to 163 per US dollar, levels not seen in four decades. A weaker currency has pushed up import costs, contributing to rising inflation, which is expected to exceed the Bank of Japan’s (BoJ) 2% target by the end of the year due to higher oil prices fueled by geopolitical tensions in the Middle East.
The government initially proposed measures that raised fears of diminished BoJ independence, including directives to align monetary policy closely with the finance ministry and changes in debt accounting. While the final cabinet-approved plan reaffirmed central bank independence “as a footnote,” markets remain wary.
To stabilize the yen and government finances, the Ministry of Finance has intervened heavily in currency markets since 2022, spending roughly £160 billion. The BoJ, despite raising its policy rate to 1%—a 31-year peak—is still pursuing comparatively loose monetary conditions and continues to buy government bonds. Japanese pension funds are also under pressure to purchase public debt, underlining the state’s heavy reliance on domestic financing.
Economists remain skeptical about the feasibility of Takaichi’s growth targets. Forecasts from the Japan Center for Economic Research predict growth of around 0.9% in 2027 and 0.85% in 2028, short of the government’s stated goals. Experts point to the challenges Japan faces in competing with China’s heavily subsidized manufacturing sectors and question whether the country’s industrial strategy can generate sufficient economic returns to justify the large-scale spending.
As Takaichi pushes forward with her transformative vision for Japan’s economy, her plans have exposed deep divisions within the ruling coalition and underscored the delicate balancing act Tokyo must perform to spur growth without destabilizing its fiscal position. The coming years will test whether this expansive investment approach can deliver sustainable recovery or if it risks triggering financial market turbulence reminiscent of other recent policy missteps elsewhere.