Japan plans to fund key policies while limiting bond issuance
Takaichi must fund food tax relief, growth investment and higher defence spending while aiming to keep new bond issuance at about 40 trillion yen.
- Japan's government plans to fund significant new policies, including a consumption tax cut on food, investments for growth, and increased defense spending.
- The administration aims to accomplish this while limiting new government bond issuance to approximately 40 trillion yen, a level similar to the previous fiscal year.
- This fiscal balancing act is challenging due to existing market pressure, which has already caused a weakened yen and a 30-year high in government bond yields over concerns about the government's spending.
- Failure to secure funding without increasing debt could trigger another severe negative market reaction, according to the article.
Japan's fiscal 2027 budget poses an immediate funding test for Prime Minister Sanae Takaichi, whose economic policies have weakened the yen and driven up government bond yields during her first year in office.
Her administration must find substantial resources for a reduction in consumption tax on food, investment to support growth and increased defence spending.
At the same time, it plans to hold new bond issuance at about 40 trillion yen, roughly matching the previous fiscal year, a difficult target given those funding needs.
The government also faces pressure from Washington.
US President Donald Trump voiced concern about the weak yen during talks with Takaichi on September 22.
US Treasury Secretary Scott Bessent had already told a September 1 press conference that he had called on Japan to abandon its reflationary policy.
Bessent increasingly feared that strains on the yen and Japanese government bonds could spill over into selling of US Treasury securities.
Those concerns led to joint Japanese-US market intervention to support the yen at the end of July, the first such operation in 28 years.
In return for US help to prevent further yen depreciation, Bessent has repeatedly pressed the Bank of Japan (BOJ) to increase interest rates.
Takaichi's administration has responded to the growing US pressure by working to reject the view that it is pursuing reflation.
Minoru Kiuchi, the minister for economic and fiscal policy, has argued that Japan is not at a stage where such a policy is needed.
Her administration “will use a straightforward approach to increase market confidence in the government”, Takaichi told parliament earlier this month.
Market concerns centre on her “responsible and proactive fiscal policy”, which investors see as favouring high economic growth through expanded government spending and monetary easing, a reflationary approach.
A July draft of the government's annual economic and fiscal policy guidelines triggered a sell-off in Japanese government bonds after investors interpreted its wording as a warning against BOJ interest rate rises.
A rise from just over 1.6% took the 10-year government bond yield to 3.115% in late September, its highest in 30 years.
The dollar, which traded just above 151 yen when Takaichi took office in October last year, approached 164 yen in late July, reaching a high not seen for about 39 years.
If the government cannot secure enough money for its measures and increases bond issuance instead, it could face another severe market reaction.
[Copyright The Jiji Press, Ltd.]
