‘We are highly exposed’: Why Japan’s election landslide is a warning sign for Canada’s fiscal future

You can listen to this episode on Amazon, Apple, and Spotify. Episode Description Recent political developments in Japan have sparked debate about the sustainability of expansionary fiscal policies in advanced economies, with particular relevance for Canada as it approaches a potential spring election. Japan’s governing party secured a commanding electoral victory following the implementation of aggressive spending measures and tax cuts, raising questions about whether similar strategies might prove politically effective elsewhere despite mounting economic concerns. The Japanese government’s approach combined substantial deficit spending with direct consumer relief, including the removal of consumption taxes on food items and additional tax reductions. These measures proved politically popular, contributing to one of the largest electoral majorities in modern Japanese history. The strategy appears designed to appeal simultaneously to asset-holding older voters, who benefit from rising stock markets, and younger voters struggling with affordability challenges. Canada appears to be following a comparable trajectory. The federal government is currently running deficits exceeding eighty billion dollars while implementing new spending initiatives, including expanded tax credits that put money directly into citizens’ accounts. These measures were introduced outside the normal budget process, suggesting a tactical response to political pressures around affordability and cost of living concerns. The political calculus behind such policies reflects a fundamental tension between short-term electoral incentives and long-term economic sustainability. Transactional approaches that deliver immediate benefits to voters through tax cuts and direct payments prove far easier to sell politically than structural reforms addressing underlying economic challenges. Issues such as regulatory burdens, foreign ownership restrictions, interprovincial trade barriers, and productivity constraints require complex solutions that lack the immediate appeal of deficit-financed spending. However, the Japanese experience also illustrates potential risks associated with sustained fiscal expansion. Over the past five years, the Japanese yen has lost half its value against the US dollar, while government bond yields have risen dramatically from below one percent to over three and a half percent. This pattern suggests markets are growing concerned about debt sustainability, creating a potentially vicious cycle where currency depreciation fuels inflation, which in turn drives borrowing costs higher. Canada faces similar vulnerabilities. When combining household debt, provincial obligations, and federal liabilities, Canada ranks among the world’s most indebted nations relative to economic output. Unlike the United States, Canada lacks a reserve currency, making it more exposed to market sentiment about fiscal sustainability. Rising government borrowing costs inevitably translate into higher interest rates throughout the economy, affecting mortgages, car loans, and business financing. This dynamic is already visible in Canadian bond markets. Despite significant interest rate cuts by the central bank, yields on five-year government bonds remain elevated, failing to decline as monetary policy would typically predict. This suggests markets are pricing in concerns about fiscal trajectory independent of monetary policy decisions. The phenomenon extends beyond Canada and Japan. The United States is running substantial deficits despite a strong economy, while Germany has relaxed its traditionally strict fiscal rules. Global debt issuance is accelerating, with governments and corporations competing for capital in increasingly crowded markets. This worldwide trend toward fiscal expansion may amplify risks for individual countries as they compete for investor confidence. This summary was prepared by NewsBox AI. Please check against delivery.