Japanese Prime Minister Sanae Takaichi has pledged to control government bond issuance and respond swiftly to market turbulence as rising borrowing costs fuel concerns over Japan’s worsening public finances.
Speaking in a policy address to parliament on Monday, Takaichi said fiscal sustainability would remain a key priority even as her government increases spending to strengthen Japan’s growth potential, including through reviews of existing tax breaks and subsidies.
“Fiscal sustainability is obviously a prerequisite in pursuing our ‘responsible and proactive’ fiscal policy,” Takaichi said.
The remarks came as rising Japanese government bond (JGB) yields raised concerns about the cost of financing the prime minister’s ambitious spending plans.
The 30-year JGB yield reached a record high of 4.235% on Monday, amid concerns over increased debt issuance and inflation worries fuelled by the Middle East war.
Japan’s public debt is roughly twice the size of its economy, the largest level among developed economies. Funding costs are also rising as the Bank of Japan raises interest rates and reduces its bond purchases in an effort to move away from decades of large-scale stimulus.
Takaichi said the government would seek to attract private investment into growth areas through “massive, long-term fiscal expenditure deployed in a well-planned, predictable manner.”
At the same time, she said annual bond issuance would be kept under control, with borrowing calibrated according to tax revenues, interest rates, debt-financing costs and economic and market developments.
“If the economy and markets make unexpected moves, we will scrutinise their impact and respond nimbly as needed,” she added.
Fiscal policy is expected to become a major focus of parliamentary debate as concerns over the financial health of advanced economies contribute to a broader rise in global bond yields.
The administration’s immediate priority is passing legislation backing Takaichi’s plan for a two-year tax cut on food items from next April. The plan triggered a bond selloff amid a lack of detail on how the resulting revenue shortfall would be covered.
The government is also preparing next year’s budget, with ministries seeking record levels of spending.
Separately, Takaichi said Tokyo would set aside multi-year funding for strategically important economic security initiatives.
“We will implement policies steadily, get things done one by one, and communicate them carefully to the public and markets,” she said.
Seeking to ease market concerns, the administration has moved to counter perceptions that its fiscal policy is reflationary or that it has pressured the BOJ to refrain from raising interest rates.
Finance Minister Satsuki Katayama said on Saturday that the government had begun refining its messaging to reassure investors that Takaichi was not pursuing reflationary policies.
However, former BOJ Deputy Governor Masazumi Wakatabe offered a different assessment, saying the recent rise in JGB yields was driven by expectations of further BOJ rate hikes rather than concerns over Japan’s finances.
Minutes from a recent meeting of the government’s key economic panel showed Wakatabe also said the government had ultimate responsibility for guiding economic policy and stressed the need for close coordination between the BOJ and the administration on monetary policy.
Ojo Triumph
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