As Japan struggles to navigate mounting economic and livelihood pressures, the country now finds itself grappling with a new layer of uncertainty – one triggered by the incendiary remarks of its own prime minister, Sanae Takaichi.

At a moment when stability is desperately needed, her provocative remarks on Taiwan have amplified market jitters, complicated diplomatic ties and added political risk to an already fragile economic landscape.

A rapidly falling yen and the 'strongest warning yet'

Japan's most immediate challenge is unfolding in the currency markets. On November 21, Finance Minister Satsuki Katayama voiced deep concern over the yen's swift and one-directional depreciation against the U.S. dollar – remarks Bloomberg described as the "strongest warning" issued since the depreciation cycle began. The weaker yen has brought palpable strain to households and small businesses, driving up the cost of imported goods and eroding purchasing power.

Tokyo has signaled it may intervene under the framework of the existing U.S.-Japan agreement if volatility intensifies. But analysts warn that external developments could add further downward pressure. According to Reuters, a senior currency strategist at Sumitomo Mitsui Banking Corporation noted that any future restrictions imposed by China – whether on travel or exports – could deepen Japan's economic strain and accelerate the yen's decline.

Bank of Japan Governor Kazuo Ueda reinforced the alarm, cautioning that currency depreciation is feeding directly into higher import prices and gradually passing through to domestic inflation. He stressed that the impact of exchange rate fluctuations on prices may become increasingly pronounced.

Inflation squeezes households as prices soar

Even as Tokyo ramps up fiscal spending, inflation continues to bite. Data released by the Ministry of Internal Affairs on November 21 showed that core consumer prices rose 3 percent year on year in October, marking the 50th consecutive month of increases.

Rice prices soared over 40 percent compared with a year earlier, fueled by crop losses linked to extreme heat. A standard 5-kilogram bag now costs an average of 4,316 yen ($27.6), prompting some consumers to lament that rice has become a "luxury."

Egg prices have climbed as well, up 13.6 percent due to avian flu outbreaks and rising feed costs.

Record budget, rising debt, growing market doubts

In response, the Japanese government approved a sweeping economic package worth 21.3 trillion yen. The 2025 supplementary budget alone amounts to 17.7 trillion yen, a 27 percent increase from the previous year and the highest level since 2022. Yet instead of reassurance, the announcement has fueled fresh skepticism. With tax revenues insufficient to cover spending, Tokyo has once again turned to increased bond issuance, exacerbating fears of deteriorating fiscal health.

Markets have already reacted. The yield on newly issued 10-year government bonds climbed to 1.76 percent on November 19, the highest level since 2008, signaling investors' unease. Japan's government debt now exceeds 260 percent of GDP – the highest among major economies – prompting Bloomberg to note that Prime Minister Takaichi is facing the most serious market test of her tenure. Analysts warn that if confidence in government policy erodes further, investors may start offloading yen-denominated assets on a larger scale.

Compounding the concern, new data from the Cabinet Office showed that Japan's real GDP contracted 0.4 percent in the third quarter of 2025 – an annualized drop of 1.8 percent. It was the first negative growth since early 2024 and a stark reminder that Japan's economic recovery remains fragile.

Political missteps add fuel to the fire

Against this backdrop of economic strain, Takaichi's controversial comments on Taiwan have ignited diplomatic backlash and rattled the market. Japanese equities opened the week of November 17 with steep volatility, particularly in retail and tourism sectors. By November 21, the Nikkei 225 had fallen 2.4 percent, reflecting both market unease and fears of lasting damage to cross-border economic ties.

The stakes are enormous. China is Japan's largest inbound tourism source, and Japanese economists warn that a sharp decline in Chinese visitors could cost the country more than 2 trillion yen. The hit would be particularly severe for regional economies that depend heavily on tourism revenue.

The fallout has already begun. According to Japanese media, China has notified Japan that it will suspend imports of Japanese seafood. Fisheries representatives expressed frustration, noting that export momentum had only recently begun to recover. "Just one statement from Takaichi, and we are shut out," one told China Media Group.