Takaichi pledges fiscal discipline as Japan’s debt bill rises

Prime Minister Sanae Takaichi addressed the growing concerns over Japan's public finances, promising to control bond issuance and swiftly respond to market turbulence. She highlighted the government's commitment to fiscal sustainability, even as it increases spending to boost growth potential. This includes reviewing existing tax breaks and subsidies to ensure long-term fiscal health.

The 30-year bond yield reached a record high of 4.235% due to fears of increased debt issuance and inflation concerns caused by geopolitical tensions. Japan's public debt, nearly double the size of its economy, is the highest among developed nations. Takaichi pledged to attract private investment in growth sectors through substantial, long-term fiscal expenditure, while maintaining a cap on annual bond issuance.

The government aims to align borrowing with tax revenues, interest rates, debt financing costs, and economic circumstances. In case of unexpected economic or market shifts, the government will closely monitor the impact and respond accordingly. The administration's priority is passing legislation for a two-year tax cut on food items, which initially caused a bond selloff due to missing details on revenue replenishment.

The government is also preparing for next year's budget, expecting record spending levels. Takaichi emphasized steady policy implementation, step-by-step progress, and careful communication with the public and markets. Finance Minister Satsuki Katayama clarified that the government is not pursuing reflationary policies, aiming to allay market concerns.

However, former BOJ deputy governor Masazumi Wakatabe, a reflationist academic, argued that the rise in JGB yields was due to expectations of further BOJ rate hikes rather than concerns over Japan's financial situation.