Analysis-Japanese PM Takaichi’s campaign to shed reflationist image needs substance behind the speeches

By Leika Kihara and Makiko Yamazaki

TOKYO, Oct 8 (Reuters) – Japanese Prime Minister Sanae Takaichi’s administration is ramping up efforts to shed its growth and easy money image through changes in rhetoric, a move that may backfire unless it is met with action such as substantial cuts to spending.

With major economies facing increased scrutiny from bond investors worried about rising inflation and yields, a lack of clarity on funding could cause another bond selloff in Japan given its $7 trillion debt pile that is the biggest among advanced nations.

Takaichi vowed to cap new debt issuance around 40 trillion yen ($253 billion), even as spending requests for next year’s budget hit a record 143 trillion yen. A planned two-year sales tax cut would also cost roughly 4 trillion yen per year.

The government hopes to fill the gap by tapping rising tax revenues and state funds, a tricky task that would still pump money and inflationary pressures into the economy, analysts say.

“Markets look at the substance of policy and won’t believe words alone,” said Eiji Doke, chief bond strategist at SBI Securities. “It’s not that market players misunderstand Takaichi’s policies. Rather, what they’re watching is completely different from what the administration is trying to do.”

Takaichi became premier in October last year with a pledge to ramp up spending to spur growth. She filled government panels with her reflationist aides to promote loose fiscal policy.

“Only by strengthening the economy would Japan achieve fiscal sustainability,” she said in a policy speech back then in explaining her plan to compile a big spending package.

The administration’s hefty fuel subsidies, a tax-cut pledge and big investment plans cemented market perceptions of its policies being reflationary as the economy struggled to recover from decades of low growth and low inflation.

But rising bond yields have become constraints on Takaichi’s ambitions, forcing her administration to change its language.

“Fiscal sustainability is a prerequisite in pursuing our ‘responsible and proactive’ fiscal policy,” Takaichi told parliament on Monday, a sharp shift from her promise a year ago to prioritise growth over fiscal discipline.

She also pledged to “control” bond issuance and enhance communication with markets in a sign of the administration’s sensitivity to rising Japanese government bond (JGB) yields.

The benchmark 10-year JGB yield has hit multi-decade highs on concern Takaichi’s spending plans may lead to increased debt issuance and strain Japan’s worsening finances.

MEET WORDS WITH ACTION

Efforts to phase out the administration’s reflationist image geared up after US Treasury Secretary Scott Bessent’s calls in August for Japan to depart from Abenomics – a mix of loose fiscal and monetary steps deployed by former premier Shinzo Abe to beat deflation.

Finance Minister Satsuki Katayama led the communication shift. In a recent media interview, she said the government decided around late August to recalibrate its messaging to reassure markets Takaichi was not pursuing reflationary policies.

Soon after, reflationist aides began to change tone. Economy Minister Minoru Kiuchi, for one, said on September 25 the phase of Abenomics-style reflationary policies was over.

Former Bank of Japan Deputy Governor Masazumi Wakatabe, another aide who sits on a government panel, also said last month reflationist policies “have no place in Japan now.”

The shift in tone occurred at the BOJ, too. Ayano Sato, a reflationist board member picked by Takaichi, told Kyodo News on Wednesday that she supports raising rates.

The government began to stress its spending plans are aimed at boosting supply capacity rather than reflating growth.

Markets are focusing on whether Takaichi will meet words with action as the government drafts next fiscal year’s budget.

To be sure, robust corporate profits and inflation will likely lead to an increase in nominal tax revenues, which some analysts estimate will hit 90 trillion yen next year.

Katayama vowed to tap unused funds and identify wasteful spending to seek revenues under Japan’s equivalent of the US Department of Government Efficiency initiative, with a focus on the 7 trillion yen pooled by about 200 state funds.

But tapping such funds for spending is unsustainable and could stimulate the economy, running counter to the BOJ’s efforts to curb inflation with rate hikes, some analysts say.

Former BOJ board member Asahi Noguchi, himself known as a reflationist, said now was the time to avoid boosting demand and causing bond yield rises that crowd out private investment.

“The administration probably didn’t have a coherent view, with some clinging to the legacy of Abenomics, though that seems to have changed,” he said. “The key is to cut wasteful spending and convince markets Japan is serious about fiscal reform.”

($1 = 157.9800 yen)

(Reporting by Leika Kihara and Makiko Yamazaki; editing by Lincoln Feast.)

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