The Japanese government seeks to dispel the fears of markets and Washington regarding its economic policies

The Japanese government sought to dispel the fears of markets and Washington about the possibility of Tokyo returning to broad fiscal and monetary stimulus policies, after Finance Minister Satsuki Katayama confirmed to her American counterpart, Scott Besent, that Prime Minister Sanae Takaichi is not adopting a “resuscitation” approach, at a time when Japan is facing great pressure from inflation, high bond yields, and a weak yen.

Katayama said on Tuesday that she made clear during a phone call with the US Treasury Secretary last week that Takaichi's approaches cannot be classified as policies that support inflation through fiscal and monetary expansion.

She added: “I explained that Prime Minister Takaichi is not a supporter of recovery policies. As she has repeatedly explained on various occasions recently, I indicated that this is something that she herself has confirmed.

The Minister of Finance confirmed that she will continue her close contacts with the US Treasury Department, and will work with Washington to ensure orderly movements in the currency markets, in reference to the great sensitivity surrounding the yen exchange rate and Japanese economic policies.

Katayama's statements reflect the Takaichi administration's efforts to change the prevailing impression in the markets that the Prime Minister is inclined towards policies that were associated with the "Abenomics" program, which was launched by the late Prime Minister Shinzo Abe and relied on strong monetary easing and flexible fiscal spending to support growth and end deflation.

Takaichi describes her financial policy as “responsible and proactive,” but investors are treating her economic agenda with caution, especially in light of government spending plans, the proposal to temporarily reduce the sales tax on food, and her relationships with economic advisors whose names were previously associated with “Abenomics” policies.

Katayama's position came after similar statements from Economy Minister Minoru Kiyoshi, who has been viewed for some time as close to the pro-economic revival trend, due to his previous reservations about raising interest rates and his connections to a group of lawmakers who support expansionary spending.

Kiuchi said last week that the phase of “Abenomics”-style recovery policies, based on monetary easing and flexible fiscal spending, has ended, in a message that reinforces the government’s efforts to show that it does not aim to reproduce previous economic policies in an environment in which the problem of inflation has become more urgent.

These statements gain additional importance after Besant pointed out that Japan's priority should be combating inflation rather than stimulating growth. His remarks reflected American concern about the persistence of some elements of “Abenomics” within Takaichi’s policies and among a number of its allies and advisors.

The discussions come at a time when Japan's economic environment is undergoing a clear transformation. After many years of facing deflation and weak demand, the authorities are dealing with persistent inflation, pressure on the currency and a sharp rise in government bond yields, coinciding with the Bank of Japan normalizing its monetary policy.

Markets have become more sensitive to any sign of additional fiscal expansion, as increased government spending could enhance inflationary pressures and lead investors to expect higher interest rates, which is directly reflected in the bond market.

Indeed, on Tuesday, the yield on 10-year Japanese government bonds remained near the highest level in 30 years, while bets increased on the possibility of the Bank of Japan raising interest rates again before the end of the year.

The yen also remains a major focus in the economic dialogue between Tokyo and Washington. The weak Japanese currency raises the cost of imports, especially energy, and adds to domestic inflation, while the authorities seek to avoid sharp or disorderly movements in the exchange market.

Successive messages from Katayama and Kiyoshi reveal that the Takaichi government is trying to draw clear boundaries between its current policy and the “Abenomics” era, while at the same time keeping room for growth-supporting spending. The challenge for Tokyo will remain to reconcile its “proactive” financial agenda with the need to control inflation and maintain the confidence of bond and currency markets.