International investors are asking where Japan’s prime minister will find the ¥370tn (£1.7tn) of extra cash that she wants to invest in 17 industrial sectors by 2040. Such is the scale of spending by Sanae Takaichi’s coalition government that many in her own party fear she is about to blow up the Japanese economy, triggering a Liz Truss-style economic shock. Nerves are also jangling in financial markets, where investors are stunned by the plans of a usually sober Japanese government to rewrite previous budget rules and embark on a wide-ranging and unfunded shopping spree.

The roots of Takaichi’s frustration date back to the financial crisis of 1991, when Japan’s property market bubble burst with spectacular effect. Tokyo had become the world’s most expensive place to live following the country’s export boom, but within months of the crash, banks behind much of the lending were bust. Before the turn of the century, a second slump brought more turmoil when some of Tokyo’s largest financial institutions, unable to cope with the hangover of bad debts from the first crash, went under.

In the late 1980s, Japan’s government debts were equal to about 60% of national income, or gross domestic product (GDP). By the end of the 1990s, and after much of the financial sector had been bailed out, the debt to GDP ratio was 130%. Since the 2008 global financial shock, the economy has stagnated.

In response, the government has regularly spent 10% more than it receives in tax receipts – much of it to cope with a rapidly ageing population – and debts have continued rising. By 2020, the debt-to-GDP ratio had reached 260% before tighter budgets and a modest improvement in economic growth brought it below 230% in 2025. Takaichi has said her investment plan will lift the productive capacity of the economy, keep Japan at the forefront of the AI revolution, and free the economy from its increasing dependence on trade with China.

The stock market has reacted with a succession of downward steps ever since the proposals were unveiled in June, though the renewal of hostilities in the Middle East and the prospect of higher oil prices have not helped. Many investors sold up almost as soon as the government arrived in office, hitting the shares of the country’s biggest companies, among them Sony and Toyota Motor Corporation. Sony faces intense competition from rivals in South Korea and China while Toyota has stood out against all-electric cars, and now faces being crushed by a flourishing and highly subsidised Chinese car industry.

Domestic and international lenders have pushed up the interest rate on Japanese government bonds (JGBs) to 2.8% in recent months, the highest in 29 years. Waning international support for Japan’s economic outlook has also hit the value of the yen. More recently it is Takaichi’s boldness, which like Truss’s is often characterised as recklessness, that has acted as a heavy weight on the currency, pushing it down to 163 to the US dollar, a four-decade low.

Much of the blame for higher debt bills is connected to rising inflation, which has tracked upwards as the yen has fallen, largely because a low currency rate raises the price of imports of energy and raw materials.