Editor's note: Yang Hangjun is a professor and the associate dean at the School of Excellence, University of International Business and Economics. The article reflects the author's opinions and not necessarily the views of CGTN.

Japanese Prime Minister Sanae Takaichi in January announced the dissolution of the House of Representatives and an early general election, a move that quickly triggered sharp turbulence in financial markets: long-term government bond yields have climbed to their highest levels in decades, while the Japanese yen has at times weakened to near 160 against the US dollar. 

While this "twin sell-off" in bonds and currency is an immediate reaction to political upheaval, it betrays deeper investor anxiety regarding Japan's loose fiscal discipline, uncertain policy continuity, and rising external risks. It also lays bare the vulnerability of an economy trapped between deep-seated structural contradictions and a pivot toward geopolitical adventurism.

Capital markets have always been a sensitive barometer of political uncertainty. The direct trigger for this bout of volatility is the erosion of investor confidence in the sustainability of Japan's public finances. As a staunch supporter of "Abenomics," Takaichi has long advocated proactive fiscal expansion. However, Japan's current macroeconomic environment is very different from that of a decade ago. According to the International Monetary Fund, Japan's public debt now stands around 230 percent of GDP, the highest among advanced economies. 

In the heat of the election campaign, political forces are competing to offer tax cuts while turning a blind eye to debt-servicing pressures and questions of fiscal discipline. For example, the proposal to suspend the consumption tax on food would, if implemented, create an annual fiscal revenue shortfall of about 5 trillion yen. Even more worrying is the debt's sensitivity to interest rates: at such a high level of indebtedness, rising interest rates will directly push up interest payments, thereby squeezing the room available for social security and public investment. The Bank of Japan's recent hawkish signals—upward revisions to its growth and inflation forecasts, which reinforce expectations of rate hikes—have undoubtedly intensified market concerns over the debt burden.

Beyond short-term policy swings, Japan's long-term economic fundamentals have not improved with the change in leadership. Data from the Ministry of Internal Affairs and Communications show that people aged 65 and above now account for around 29.4 percent of the population. Rapid population ageing is not only driving up rigid expenditures such as social security, but also leading to a sustained contraction in the labor supply. 

Coupled with weak domestic demand and insufficient innovative dynamism, Japan's potential growth rate has lingered at a low level for an extended period. In this structural predicament, the marginal effect of fiscal or monetary stimulus has approached zero. Without structural reforms that genuinely raise total factor productivity, yen-denominated assets will struggle to continue attracting global capital allocations. This is also the fundamental reason why the yen remains weak even amid expectations of interest rate hikes.

Even more serious is that Takaichi's radical geopolitical stance is steadily amplifying external risks to the Japanese economy. She has repeatedly made provocative and erroneous remarks on China's internal affairs. As Japan's largest trading partner, China is deeply intertwined with Japan through economic and trade links. Elevating geopolitical maneuvering above economic rationality not only gravely undermines mutual trust, but will also significantly increase volatility in supply chains and market expectations, ultimately eroding Japan's own growth base and financial stability.

Confronted with the red alert signaled by this bond and currency sell-off, Japanese policymakers need to soberly recognize that the fundamental way out of economic stagnation lies in advancing difficult but indispensable structural reforms, in rebuilding fiscal discipline, and in safeguarding a peaceful and stable regional environment for development. 

If Japan continues to rely on short-term measures such as monetizing fiscal deficits while engaging in dangerous political manipulation over China's internal affairs, its economy may face challenges even more severe than the "Lost Three Decades." For the Takaichi cabinet, pulling back from the brink and returning to a path of economic rationality and pragmatic diplomacy would be the responsible choice for the country's future.