The yen and Japanese government bonds both hit new lows, raising market concerns over "debt risks," and Sanae Takaichi is under immense pressure.

Concerns about Japan's fiscal discipline are causing turbulence in financial markets, with both the yen and Japanese government bonds under pressure.

On Tuesday, November 18, the yen fell to 155.37 against the US dollar, hitting a new low since January; the exchange rate against the euro also dropped below 180, marking its weakest level since the euro was introduced in 1999.

Meanwhile, Japan's government bond market is experiencing sell-offs. The yield on 10-year government bonds rose to 1.754%, its highest since June 2008, while the yield on 20-year government bonds touched its highest level since 1999 on Monday.

Behind the market turmoil, there is increasing speculation that the upcoming large-scale stimulus plan from the Sanae Takaichi government will exacerbate Japan's already heavy debt burden and may lead the Bank of Japan to delay interest rate hikes. Investors are closely watching the scheduled meeting between Sanae Takaichi and Bank of Japan Governor Kazuo Ueda at 3:30 p.m. Tokyo time to look for clues about future policy direction.

As the yen broke the key psychological threshold of 155, Finance Minister Katsuki Katayama intensified verbal warnings, stating that she is monitoring the market's "one-sided and rapid fluctuations" with heightened caution, raising market alertness to potential intervention risks.

Rising Expectations for Fiscal Stimulus, Debt Worries Drag on Bond Market

Market concerns about Japan's government debt levels are mounting, directly reflected in falling bond prices. According to a Bloomberg survey, the additional spending in the economic measures soon to be introduced by the Sanae Takaichi government is expected to exceed last year's 13.9 trillion yen. According to local media, some ruling Liberal Democratic Party members even proposed on Monday to expand the stimulus plan to about 25 trillion yen.

To cover the massive expenditures, the government may need to issue new bonds, further pressuring the world's most heavily indebted developed economy. Fawad Razaqzada, global macro market analyst at FOREX.com, said the Japanese government is preparing large-scale fiscal stimulus while opposing the Bank of Japan's normalization of monetary policy.

"The market worries the government is mismanaging the economy, so when holding what they see as riskier Japanese debt, they demand a higher yield."

Such worries may also impact the demand for Wednesday's 20-year government bond auction. On November 19, the Ministry of Finance will auction 800 billion yen in 20-year bonds.

Weak Economic Data, Sanae Takaichi Faces Dilemma

The justification for a large-scale stimulus comes from Japan's latest weak economic data. A government report shows that the Japanese economy contracted by 1.8% annually over the summer, marking the first decline in six quarters. Finance Minister Katsuki Katayama also noted that although consumption and investment have grown quarter-on-quarter, US tariffs have led to a drop in exports, and "there is clearly enough reason to formulate economic measures."

However, this puts the dovish Sanae Takaichi in a dilemma. On one hand, weak economic data supports her push for massive spending; on the other hand, a large plan that relies on debt issuance, combined with expectations that the Bank of Japan will delay rate hikes, is putting downward pressure on the yen. Yen depreciation raises the cost of imported goods, which runs counter to her efforts to ease the pain of inflation by cutting gasoline taxes and utility subsidies.

Sanae Takaichi and Kazuo Ueda's Meeting Approaches, Rate Hike Path Remains Unclear

Amid market turmoil, the meeting between Sanae Takaichi and Kazuo Ueda has become the center of attention. As an advocate for dovish monetary policy, Sanae Takaichi has suggested she supports the Bank of Japan's slow approach to raising rates, which traders see as a "green light" for shorting the yen.

However, a weak yen raises import costs and hinders her efforts to mitigate inflation's impact on households. Any statements made after the meeting will be closely interpreted by the market for clues about the timing of the next rate hike—most economists predict a hike no later than January next year.

Tsuyoshi Ueno, chief economist at NLI Research Institute, said: "Takaichi needs to be careful; if she directly calls for a temporary freeze in rate hikes, she could easily push the yen past the 160 level." He predicts that Takaichi may subtly signal her opposition to early hikes, while Ueda will likely reaffirm the Bank of Japan's stance on increasing rates.

"Verbal Intervention" Escalates, External Pressure Emerging

Facing continued yen depreciation, the Ministry of Finance's "verbal intervention" is escalating. Finance Minister Katsuki Katayama told reporters Tuesday she sees "extreme, one-sided, and rapid moves in the forex market" and is "deeply concerned." This has increased speculation the Ministry of Finance may directly intervene to support the yen.

In addition to internal pressure, the Takaichi government is also facing rare external pressure. US Treasury Secretary Janet Yellen last month urged the Takaichi government to give the Bank of Japan room to adjust policy in response to inflation, an unusually frank comment from a senior US Treasury official.

History seems to be repeating itself. Last July, the yen once fell to 161.95 against the dollar, its lowest since 1986, prompting government intervention and an unexpected Bank of Japan rate hike a few weeks later, causing turmoil in global financial markets.

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