International investors are asking where Japan’s Prime Minister Sanae Takaichi will find the ¥370tn (£1.7tn) of extra cash she wants to invest in 17 industrial sectors by 2040. The scale of spending by her coalition government has even members of her own party fearing she is about to blow up the Japanese economy, triggering a Liz Truss-style shock. Nerves are jangling in financial markets, where investors are stunned by plans to rewrite budget rules and embark on an unfunded shopping spree.

The roots of Takaichi’s frustration date back to 1991, when Japan’s property bubble burst. Tokyo had become the world’s most expensive place to live, but within months banks were bust. By the late 1980s, government debt was 60% of GDP; by the end of the 1990s, after bailing out the financial sector, it hit 130%. Since 2008, the economy has stagnated, with the government regularly spending 10% more than it receives. By 2020, debt-to-GDP reached 260%, before falling below 230% in 2025.

Takaichi says her investment plan will boost productive capacity, keep Japan at the forefront of AI, and reduce dependence on trade with China. The stock market has reacted with downward steps since the proposals were unveiled in June, and the yen has fallen to 163 to the US dollar, a four-decade low. Sony and Toyota have been hit by investor sell-offs. The interest rate on Japanese government bonds has risen to 2.8%, the highest in 29 years.

Kelvin Lam of Pantheon Macroeconomics says markets fear the lack of detail on financing: “As long as you don’t say how you are going to finance your spending, you are on course for a Liz Truss moment.” Takaichi’s coalition secured a two-thirds majority after a snap election in February. A draft plan included forcing the Bank of Japan to walk in lockstep with the finance ministry, though a final submission pledged central bank independence as a footnote.

The Honebuto no Hoshin (big-boned policy) aims to inject cash into 17 sectors over 14 years to double growth above 1%. Targets include AI, semiconductors, biotech, defence, energy and shipbuilding. Forecasts point to growth of 0.93% in 2027 and 0.85% in 2028, falling short. The government has spent £160bn since 2022 to limit the yen’s decline and pressured the central bank to keep rates low. The BoJ has raised its policy rate to 1%, a 31-year high, but still low relative to peers.

Takaichi said on X that she spends all day plotting Japan’s recovery, an attempt to reverse a 10-point poll rating decline. The question is whether Tokyo can compete with China, as exports rose 20% year-on-year in June but the value was almost zero after accounting for yen depreciation. Depreciating the currency every year is not sustainable, but maybe the investment plan will be.