Japan’s ‘Iron Lady’ must continue to commit to global trade to combat debt

Japan’s central government debt has surpassed ¥1,340 trillion, a figure that captures both the scale of its post-pandemic borrowing and the complexity of its fiscal future. For decades, Japan has defied predictions of a debt crisis, largely because most of its bonds are held domestically by banks, pension funds and the central bank. But as interest rates creep up and political stability falters, questions are growing over how long this delicate balance can hold.

At the heart of this new era is Sanae Takaichi, the recently elected leader of Japan’s ruling Liberal Democratic Party (LDP), who stands poised to become the country’s first female prime minister.

Yusuke Takanishi, Partner, said:

While Ms. Sanae Takaichi’s economic philosophy clearly channels elements of Thatcherite fiscal discipline, deregulation, and private-sector-led growth, she also proposes targeted state investment in strategic areas like technology, defence, and energy. However, her room for manoeuvre is already constrained by Japan’s heavy debt burden.

Political turbulence meets fiscal fragility

Japan’s fiscal picture is tightening just as its politics become more unpredictable. Earlier this month, the Komeito Party, The LDP’s junior coalition partner for more than a quarter of a century, announced its withdrawal from government, citing concerns over political funding reforms and transparency.

Yusuke warned:

However, with the Komeito party announcing its withdrawal from the coalition with the Japanese Liberal Democratic Party, the government loses a stabilising coalition partner, making policy execution more delicate and subject to parliamentary fragility. With the coalition fractured, uncertainty over trade, taxation, and tariff policy will increase.

The split leaves Ms Takaichi without a parliamentary majority, complicating her ability to deliver budget reform or push through economic stimulus. The loss of Komeito’s moderating influence also risks widening the ideological gulf within the LDP, increasing uncertainty for markets and international investors alike.

Already, the bond market is flashing warning signs. Ten-year Japanese Government Bond yields have climbed to their highest level since 2008, while the yen has weakened sharply past ¥150 to the US dollar—an uncomfortable mix of rising borrowing costs and currency vulnerability that puts further pressure on fiscal policy.

Trade as Japan’s lifeline

In this environment, maintaining open trade and foreign investment has become a strategic necessity.

Yusuke Takanishi said:

Central government debt exceeds ¥1,340 trillion as of August 2025. But maintaining Japan’s commitment to open trade and economic stability is a good way to prevent this fiscal pressure increasing, and even potentially alleviate it.

Japan’s deep engagement in rules-based trade frameworks—including the UK–Japan Comprehensive Economic Partnership Agreement (CEPA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—continues to underpin its credibility as a global trading power.

Yusuke added:

Japan’s continued engagement through the UK–Japan Comprehensive Economic Partnership Agreement (CEPA) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) frameworks underscore its preference for rules-based commerce over protectionist shocks. Sanae Takaichi and the UK Prime Minister, Keir Starmer must continue to lower Japan-UK trade barriers and encourage mutual investment in each other’s economies.

That commitment to openness will be tested. Around the world, governments are turning inward, subsidising domestic industries and revisiting trade dependencies. Japan, a major exporter of advanced technology and capital goods, faces pressure to defend its interests without succumbing to protectionism.

Ms. Takaichi must avoid the tariff and protectionism approach to trade that President, Donald Trump has taken. This has strained global supply chains, heightened uncertainty and damaged relationships with key allies. Stable trade relations are the key to a stable economy.

What Japanese firms in the UK should do next

While Japan’s policymakers navigate this uncertain landscape, businesses must also adapt. A combination of political instability, potential policy divergence, and exchange-rate volatility calls for renewed focus on resilience and flexibility.

Yusuke said:

Japanese firms operating in the UK must seize this moment to re-examine customs frameworks, transfer pricing structures, and incentive schemes. A flexible strategy that can adapt to rapid shifts in governance will be essential.

For companies active between the UK and Japan, this means:

• Reassessing supply chains in light of possible tariff realignments or policy fragmentation.
• Reviewing transfer pricing and financing arrangements as both countries adjust to changing interest rate environments.
• Leveraging CEPA and CPTPP provisions to reduce friction and take advantage of preferential trade terms.
• Monitoring political signals, especially around tax policy, industrial strategy, and bilateral investment priorities.

Looking ahead

Japan’s next phase will test the credibility of its fiscal and political institutions. The combination of record debt, rising yields, and an unsettled coalition is unfamiliar territory for a country long defined by stability and continuity. Yet, as Yusuke Takanishi notes, Japan’s openness to trade and international cooperation remains its greatest source of strength.

For Japanese companies operating in the UK—or British firms investing in Japan—this is a moment to engage more deeply, not retreat. Understanding the evolving political and regulatory environment will be essential to turning uncertainty into opportunity.