Weak yen and long-term interest rates at historic levels, pressure to revise the signature policy of "active fiscal policy" - 1 year since the Takaichi administration took office

The 21st marks one year since the inauguration of the Takaichi administration. Concerns that the government's flagship policy of ``responsible and active public finance'' would lead to increased issuance of government bonds and acceleration of inflation led to a historic depreciation of the yen and a rise in long-term interest rates. In order to curb the turmoil in the financial markets, the administration has increasingly made statements emphasizing ``fiscal sustainability.'' However, in order to secure market confidence, there are challenges ahead, including curbing government bond issuance and securing financial resources in preparation for year-end budget formulation.

Prime Minister Takaichi pursues economic growth and calls for "fiscal sustainability" - speech expressing his beliefs

Markets have assumed that Prime Minister Sanae Takaichi is pursuing a ``reflation'' policy that aims for high growth through aggressive fiscal stimulus and monetary easing, and have become increasingly concerned about Prime Minister Sanae Takaichi's economic and fiscal management. The yen exchange rate, which was around 151 yen to the dollar when the government took office in October last year, plummeted to around 164 yen in late July this year, the first time in about 39 and a half years. The yield on 10-year government bonds, an indicator of long-term interest rates, rose sharply from the 1.6% level at the time of its inception to 3.115% in late September, the first time in about 30 years.

In the process of deciding on the ``robust policy'' for basic economic and fiscal management and reform in July, the draft's description, which was perceived as a check on the Bank of Japan's interest rate hikes, turned into a ``robust shock'' that led to selling of Japanese government bonds.

U.S. Treasury Secretary Bessent became increasingly frustrated with the economic policies of the Takaichi administration. There are concerns that the ``Japanese selling'' of the weak yen and weak bonds will spill over into the selling of U.S. bonds. At the end of July, the Japanese and U.S. monetary authorities launched the first coordinated yen-buying intervention in 28 years.

Mr. Bessent, who extended a helping hand to Japan, repeatedly demanded an early interest rate hike from the Bank of Japan, as if seeking something in return. At a press conference on September 1, he explained that he had told Japan that it should end its reflationary policy. At the Japan-U.S. summit meeting on September 22nd, President Trump expressed concern about the depreciation of the yen.

In order to fend off pressure from the United States, the administration is working hard to deny its ``reflation policy.'' Economic and Fiscal Affairs Minister Minoru Jouchi said, ``We are not in a situation where a reflationary policy is necessary.'' In his policy speech at the extraordinary Diet session, the Prime Minister emphasized that he would ``increase the market's trust in the government by attacking the government squarely.''

Next year's budget will require huge financial allocations for consumption tax cuts, growth investments, and increased defense spending. The administration plans to keep the amount of new government bonds issued at around 40 trillion yen, the same as last year, but the hurdles are high. If there is no progress in securing financial resources and this leads to increased issuance of government bonds, there is a risk that the government will be exposed to the market once again.