Japan’s political and financial landscape shifted again this week as Sanae Takaichi, poised to become the nation’s first female prime minister, appointed former Prime Minister Taro Aso as Vice President of the Liberal Democratic Party (LDP). The move, announced Tuesday, is being read as a calculated effort to temper market fears over excessive fiscal expansion while maintaining party unity.

Alongside Aso, Takaichi also tapped Shunichi Suzuki, Japan’s former finance minister, as LDP Secretary-General—a position regarded as one of the most powerful in Japanese politics, controlling both party funds and internal operations.

These appointments come just days after Takaichi’s victory in the LDP leadership election, securing her path to succeed Fumio Kishida and take the reins as Japan’s new prime minister. Her win sent a jolt through global markets: Tokyo’s Nikkei index climbed more than 2%, while the yen weakened beyond ¥152 per dollar, as investors priced in expectations of large-scale fiscal stimulus and continued dovish pressure on the Bank of Japan (BOJ).

Balancing Stimulus with Fiscal Prudence

Analysts see Takaichi’s choices as an attempt to build a policy equilibrium between her ambitions for economic revival and Japan’s fragile fiscal realities.

“During the leadership race, the Aso faction backed Takaichi, so her administration may remain strongly influenced by him,” said Takahide Kiuchi, Executive Economist at the Nomura Research Institute. “Aso’s influence could moderate overly aggressive fiscal spending or excessively dovish monetary impulses,” he added, noting that Suzuki is also widely regarded as an advocate for fiscal discipline.

Taro Aso, who previously served as Japan’s prime minister during the 2008 global financial crisis and as finance minister under Shinzo Abe, has long championed balanced fiscal policy. While he supported Abe’s Abenomics—marked by heavy government spending and loose monetary conditions—Aso repeatedly warned against Japan’s ballooning debt, which now exceeds 250% of GDP, the highest among advanced economies.

By bringing Aso and Suzuki into her leadership team, Takaichi appears to be signaling to markets that her administration will pursue growth-oriented policies, but within a framework of caution and stability.

Bond Market Volatility Intensifies

Despite these reassurances, Japan’s bond markets remain tense. On Tuesday, the 20-year Japanese Government Bond (JGB) yield surged to a 26-year high, while the 10-year yield climbed to levels unseen in 17 years, reflecting investor concern that fiscal discipline may erode under Takaichi’s government.

Goldman Sachs and Deutsche Bank analysts both noted that bond traders are bracing for the potential of larger deficit spending—especially if Takaichi seeks parliamentary support from opposition parties.

Reports in Japanese media suggest Takaichi is in early talks with the Democratic Party for the People (DPP), which has proposed income tax cuts aimed at increasing disposable income for middle-class households. Such an alliance could expand her parliamentary majority but at the cost of significant fiscal concessions.

“If Takaichi were to align with the Democratic Party, the overall size of government spending could rise depending on what concessions are made,” said Naomi Muguruma, Chief Bond Strategist at Mitsubishi UFJ Morgan Stanley Securities. “There’s no guarantee Aso will act as a firm counterweight to large spending programs,” she added. “Given the uncertainty, many investors are likely to stay cautious on JGBs.”

Markets React with Unease

Investor sentiment remains mixed. While Japan’s equity markets have responded positively—banking, infrastructure, and construction stocks have led recent gains—bond investors and currency traders remain wary. The yen’s decline reflects market expectations that Takaichi may pressure the BOJ to maintain ultra-loose monetary policy longer than previously anticipated.

The potential for rising long-term yields poses another challenge: higher borrowing costs could test Japan’s already strained fiscal position and ripple across global bond markets. Economists warn that a sustained surge in JGB yields could spill over into U.S. and European debt markets, amplifying global rate volatility.

A Defining Moment for Japan’s Fiscal Future

As Takaichi prepares to assume office, her appointments reflect an effort to balance political loyalty, economic pragmatism, and fiscal credibility. Her partnership with Aso may bring stability to her cabinet, but whether it will be enough to calm the bond markets remains uncertain.

For now, Japan stands at a crucial inflection point. The country’s new leadership team must confront sluggish wage growth, persistent inflation pressures, and record debt levels—all while restoring investor confidence. How Takaichi navigates this complex terrain will shape not just Japan’s economy but potentially influence global financial markets in the months ahead.