A decline in Sanae Takaichi's poll ratings could trigger additional fiscal stimulus; vigilance warranted as risks in Japanese markets spill over globally via yield channels into equities and bonds.

According to Zhitong Finance, several seasoned financial market strategists stated that the decline in Japanese Prime Minister Sanae Takaichi’s approval rating could prompt the government to adopt a more aggressively accommodative stance on fiscal spending and tax policy. This would further exacerbate investors’ already heightened concerns about Japan’s currency and bond markets, with such anxieties potentially spilling over into global equity and bond markets, leading to sustained and severe market turbulence. Strategists widely worry that if public opinion polls continue to deteriorate, the government may place even greater emphasis on stimulus measures, which would be detrimental to Japanese government bonds, the yen, and global equity and bond market dynamics.

Although Sanae Takaichi’s approval rating remains above 50%, recent opinion polls conducted by Japanese media outlets show that her support has fallen to its lowest level since she assumed office. Speaking in the Diet on Monday, Takaichi said she had not yet analyzed the specific reasons behind the decline but added that she would take the polling results ‘into consideration as a reflection of public sentiment.’

Naka Matsuzawa, Chief Market Strategist at Japanese financial giant Nomura Securities, remarked that if polling numbers continue to worsen, the Japanese government led by Sanae Takaichi is likely to push even more forcefully for its current stimulative policy stance, which would be unfavorable for global bond assets and the yen exchange rate.

Takaichi has significantly lagged in fulfilling her campaign pledge to cut the consumption tax on food items. Several veteran political figures have criticized this policy as fiscally imprudent and accused it of pandering to voters. Recently, multiple Japanese government officials indicated that the aim is to finalize this policy by early August.

‘If the government begins reinforcing its reflationary policies, this will pose a significant threat to both the global bond market and the yen,’ Matsuzawa stated. He added that persistently rising government bond yields would also be highly detrimental to Japanese equities—and indeed global equities—as this could signal a weakening capacity of the government to implement coherent policy.

Rinto Maruyama, Senior FX and Rates Strategist at SMBC Nikko Securities, shared a broadly similar view. He noted that public dissatisfaction with the Takaichi administration stems primarily from its failure to contain rising prices, which ‘will serve as a catalyst for the Japanese government to further expand fiscal spending and strengthen related policy responses.’

The decline in Takaichi’s approval rating itself does not mechanically weaken the yen or Japanese government bonds; what truly affects markets is the government’s policy reaction function. Some July polls showed her approval rating falling to 57% from 69% in June, with 71% of respondents dissatisfied with the government’s handling of inflation. Against this backdrop, the government is more likely to attempt to restore public confidence by suspending the 8% consumption tax on food, expanding subsidies, and increasing fiscal outlays. If such tax cuts lack a clearly defined permanent funding source, markets will interpret them as ‘using fiscal expansion to offset a cost-of-living crisis’ rather than as supply-side reforms aimed at boosting productivity. This could simultaneously drive up Japanese inflation expectations, increase pressure on government bond issuance, and elevate risk premiums across global bond markets.

Pressure on the Japanese government bond (JGB) market is even more direct, particularly along the ultra-long end of the yield curve (20- to 40-year maturities). Food tax cuts and additional spending imply a potential increase in future government bond supply, while the Bank of Japan is advancing policy normalization—forcing the market to absorb greater duration risk. With Japan’s government debt-to-GDP ratio still well above 200%, investors will demand higher term premia in the bond market.

Since the beginning of this year, long-end sovereign bond yields in major developed markets have continued to surge. Several of the world’s largest central banks have issued new warnings regarding fiscal spending, persistently rising debt servicing costs, and demand for long-dated government bonds. Consequently, under Prime Minister Takaichi’s continuation of ‘Abenomics’-style policy settings—combined with upward pressure from term premia—the probability that 10- and 30-year JGB yields will rise to multi-year highs continues to increase.

Term premium refers to the additional yield compensation investors demand for bearing the risks associated with holding long-term bonds. This premium is especially pronounced in the U.S. Treasury market, where it has remained near decade-high levels throughout this year.

The typical trading pattern in the JGB market is a bear steepening of the yield curve: ultra-long yields rise more than short-end yields, reflecting fiscal risks rather than merely expectations of central bank rate hikes. However, if disorderly selling emerges at the long end, the Bank of Japan could still stabilize the market through temporary bond purchases or by adjusting the pace of its quantitative tightening. This implies that Japanese government bonds will enter a high-volatility regime characterized by a tug-of-war between fiscal expansion pushing yields higher and central bank intervention capping tail risks—rather than a straightforward one-way bear market.

The global transmission channel stems from Japan’s dual role as both a major creditor nation and a key source of long-term, low-cost funding. As of end-2025, Japan’s net international investment position is projected to stand at approximately JPY 561.75 trillion. When JGB yields rise and the hedged returns on U.S. and European sovereign bonds decline relatively, Japanese insurers, pension funds, and banks may reduce their overseas bond allocations or repatriate capital, thereby pushing up long-end yields globally, including those of U.S. Treasuries and European government bonds.

For equity investors, a weaker yen benefits Japanese exporters in the near term, and a steeper yield curve could improve banks’ net interest margins. However, imported inflation, elevated funding costs, and a discount on policy credibility will weigh on domestic demand, real estate, and high-valuation growth stocks. Should the Bank of Japan ultimately be forced to accelerate tightening and trigger a rapid yen appreciation, globally leveraged carry trades funded in yen could face concentrated unwinding, delivering a second-round shock to high-beta assets such as technology stocks, crypto assets, and emerging markets. Therefore, the core investment implication of this round of political risk stemming from the Japanese prime minister’s falling approval ratings is not to immediately take broad short positions across Japanese assets, but rather to guard against the nonlinear risk of a simultaneous breakout in long-end JGB yields and a sudden reversal in the yen exchange rate.

Editor/Deng