Investors on High Alert as Japanese Market Turbulence Sparks Global Concern
Investors worldwide are closely monitoring developments in Japan following a week of significant market volatility, described by some analysts as a "Liz Truss-lite moment." The focus intensified on Monday 26 January 2026, as Japanese Prime Minister Sanae Takaichi indicated her government's readiness to take decisive action to support the yen, leading to notable currency movements and equity market declines.
Yen Strengthens Amid Government Intervention Signals
The Japanese yen experienced its third consecutive rise against the US dollar, climbing 0.8 per cent to close at ¥153.8. This upward movement followed Prime Minister Takaichi's Sunday announcement that authorities were prepared to implement "necessary steps" to counteract speculative activities affecting either the yen or Japanese government bonds. Her statement has fuelled speculation about potential coordinated intervention between Japanese and US central banks to stabilise the currency if required.
Chris Turner, a foreign exchange analyst at ING, commented: "From what we understand so far, Japanese authorities may have intervened on Friday when USD/JPY pushed above ¥159 after the Bank of Japan policy meeting. The significant development, however, was widespread discussion that at the London close on Friday, the Federal Reserve began inquiring with New York banks about their position sizes in USD/JPY. This was interpreted as akin to a 'rate check,' potentially signalling preparation for physical intervention."
Market Reactions and Underlying Concerns
While intervention measures have temporarily calmed bond markets, with yields on Japanese government bonds decreasing on Monday after sharp increases since November, the yen's appreciation negatively impacted Japanese equities. The Nikkei 225 index fell by 1.8 per cent, reflecting investor concerns about export competitiveness.
Tom Stevenson, investment director at Fidelity International, explained: "The yen plays a crucial role in influencing Japanese shares due to the economy's heavy reliance on exports. A strengthening yen makes these exports less competitive internationally, so it was unsurprising to see the Nikkei 225, one of last year's strongest global markets, retreat at the week's start."
Root Causes of Market Jitters
The recent market turbulence stems largely from apprehensions surrounding Prime Minister Takaichi's fiscal policies. Since becoming Japan's first female prime minister in October, she has unveiled an economic stimulus package valued at $135.4 billion, featuring substantial tax cuts designed to alleviate living costs and stimulate economic growth. This package is to be funded through additional borrowing and higher-than-anticipated tax revenues.
Compounding these concerns, Takaichi called a snap election last Monday, seeking public endorsement for her policy agenda while simultaneously announcing a two-year suspension of Japan's consumption tax on food. This measure adds tens of billions to the already substantial fiscal package, yet details regarding its funding remain unspecified, exacerbating market unease given Japan's existing debt burden.
Japan's debt-to-GDP ratio stands at approximately 260 per cent, the highest among major global economies. In response to the prospect of further borrowing, yields on Japanese government bonds surged last week, with the 10-year bond interest rate reaching its highest level since 1999, while the yen weakened to ¥159 against the dollar last Friday.
Analyst Perspectives and Future Outlook
Ken Griffin, chief executive of Citadel Securities, remarked at a World Economic Forum event: "Japan appears to have experienced a Liz Truss-lite moment. This represents one of the most substantial yield movements this century, indicating that bond vigilantes have returned to the forefront."
Although current interventions have provided temporary relief, investors remain vigilant as Japan approaches its election on 8 February. Hal Cook, senior investment analyst at Hargreaves Lansdown, noted: "The Bank of Japan made clear on Friday their willingness to support the government bond market if necessary, which has alleviated immediate investor concerns. However, further volatility is anticipated in the coming weeks."
Market participants will continue to scrutinise Japanese fiscal developments, currency movements, and potential central bank actions, recognising that sustained stability may hinge on post-election policy clarity and debt management strategies.
