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Her administration unveiled a big spending spree last month to boost growth and help Japanese families. The package, worth $135 billion (€116 billion), includes cash handouts to parents and energy subsidies.

Can the stimulus accelerate growth in Japan?

Werner Pasha, a Japan expert and professor emeritus at the University of Duisburg-Essen's Institute of East Asian Studies, believes the stimulus won't significantly foster economic expansion.

"First, additional demand means that there will be more inflationary pressure, possibly already in the short term, but at least in the medium term," he told DW. "Second, it is questionable whether the government can really increase effective expenses so fast as it would like to. In the past, it could not."

Margerita Estevez-Abe, an expert on Japan at Syracuse University's Maxwell School, also thinks most of the items on Takaichi's budget will do little to accelerate growth.

She said Takaichi would promise investments in a long list of key sectors such as AI, semiconductor, bio-tech, space, shipping and aerospace. "But this looks like a wish list rather than a serious strategic plan."

Estevez-Abe argues more spending "is the wrong cure" for Japan's woes, which she said were the result of "structural challenges" such as an aging and shrinking population, inadequate investment in public education and misallocation of capital to inefficient sectors.

"I don't think Takaichi's budget, or anything she has stated so far, addresses any of the core underlying factors," she said.

Japan's public finances in bad shape

The premier's expansive spending plans, however, risk further straining public finances.

Japan already has the highest debt load among advanced economies, at about 250% of its total economic output, or gross domestic product (GDP)Ad

But it has so far avoided a borrowing crisis, largely due to the structure of its debt.

All government bonds are denominated in the Japanese currency, yen, and over 90% of them are being held by Japanese institutions, including more than half by the central bank.

While the Japanese government is highly indebted, the economy as a whole is "rich," says Franz Waldenberger, director of the German Institute for Japanese Studies, adding that Japan's share of net foreign assets as percentage of GDP is "among the highest in the world."

"I call it 'rich country, poor government,'" he told DW.

Rising yields and stubborn inflation

Nevertheless, the sluggish economy and the latest spending spree have increased the cost of debt, with the interest charged by investors to hold Japanese government bonds climbing in recent months.

Yields on Japan's 10-year government bonds — the total annual return an investor expects from a bond and fluctuating inversely with the bond's price — jumped last week to 1.92% — their highest level in nearly two decades.

"Japan's bond market is teetering on the edge of a self-inflicted wound," Alicia Garcia-Herrero, chief economist for Asia-Pacific at French investment bank Natixis, told DW. She said Tokyo's "reckless spending spree" is "like watching a gambler double down on a losing hand."

Inflation, meanwhile, has remained consistently above the central bank's 2% target.

The resource-poor country depends heavily on foreign food, energy and raw materials to power its economy. And a weak yen is contributing to price pressures by making imports more expensive.

"Inflation will only come down when the yen strengthens, but this requires a rate hike, which negatively impacts the government's ability to borrow," said Estevez-Abe, who sees Takaichi's plan as a no-win situation.

The Bank of Japan last raised its policy rate from 0.25% to 0.5% in January but has since left it unchanged. And there's speculation that the central bank is preparing to hike rates at its upcoming meeting on December 18-19.

Fears of 'carry trade' unwind

The combination of higher interest rates and better yields on Japanese government bonds has sparked concern in financial markets as to how it will impact the so-called carry trade.

For decades, global carry-trade investors have taken out low-cost loans in Japanese yen and used the borrowed money to buy higher-yielding assets abroad, such as US equities and Treasury bonds.

The practice works as long as interest rates in Japan remain low and the yen is weak.

But if Japanese interest rates and bond yields rise, and the yen strengthens, the carry trade might unwind, potentially triggering market turbulence and hitting asset valuations worldwide, particularly those of risky assets like cryptocurrencies and tech stocks.

"This mess is supercharging fears of a yen carry trade implosion, that $20 trillion global Ponzi scheme where cheap yen loans fuel everything from Wall Street tech bubbles to emerging market excesses," said Garcia-Herrero.

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Even though the odds of this turning into a massive financial crisis like the one in 2008/09 are low, she said it could hit the markets hard by "shredding equities by 5-12% and jacking up bond yields 20-40 basis points."

Pasha described the yen carry trade as a "rather perverse macroeconomic phenomenon," explaining that it has contributed to "the exuberance with respect to bitcoin and, arguably, the extreme valuation of high-tech and AI stocks," among other problems.

From that perspective, Pasha underlined, "it is even to be welcomed that eventually there are forces for the yen carry trade to be reduced or even to be reversed."

Nevertheless, there is a danger that "markets could destabilize and spiral out of control, if financial flows change too abruptly," he warned, adding that "a purely financial phenomenon like the unwinding of the carry trade will be less harmful" for the markets than a serious real-world event like an intensifying US-China trade war or a new pandemic.

Edited by: Uwe Hessler