Japan’s bond yields have been hitting decades-long highs. Its sharemarket is sliding. The yen is slumping. The country’s new prime minister has monster challenges, with implications for markets and economies elsewhere.

Last week, Sanae Takaichi unveiled her responses to an economic contraction (the September quarter saw the economy shrink at an annualised rate of 1.8 per cent), persistent inflation of 3 per cent, a weakening currency, the impact of Donald Trump’s tariffs and the affordability issues for households that are prevalent elsewhere.

She announced a ¥21.3 trillion ($211 billion) stimulus package that includes subsidies for energy costs, a cut in Japan’s petrol tax, cash handouts for households, rice vouchers and investments in shipbuilding, semiconductors and artificial intelligence.

Japan’s Prime Minister Sanae Takaichi faces monster-sized economic challenges.Credit: AP

To fund the package, Takaichi will need to issue more government bonds. Japan is already the world’s most indebted economy, with a debt-to-GDP ratio of about 230 per cent.

Until relatively recently, that hasn’t been a major threat to stability as, over recent decades, the Bank of Japan, Japanese insurance companies and other institutions have bought most of the bonds issued.

The BoJ, in fact, owns more than half the government’s debt. Its buying has suppressed Japan’s interest rates and the cost of the government debt.

Japan is already the world’s most indebted economy, with a debt-to-GDP ratio of about 230 per cent.

But the central bank has relatively recently been........

© The Sydney Morning Herald