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

Japanese Prime Minister Sanae Takaichi's administration is making efforts to break away from its reflationist image through changes in rhetoric. However, unless accompanied by concrete actions like significant spending cuts, this shift may backfire. Takaichi has promised to cap new debt issuance at around 40 trillion yen, even as spending requests for next year's budget have reached a record 143 trillion yen.

The government aims to fill the funding gap by tapping rising tax revenues and state funds, but this could fuel inflationary pressures. Markets are wary of the substance behind Takaichi's policies and are not convinced by mere words. Finance Minister Satsuki Katayama has led a communication shift, emphasizing fiscal sustainability and signaling a move away from the administration's reflationist policies.

The 10-year Japanese government bond (JGB) yield has reached multi-decade highs, reflecting concerns about the government's spending plans. Efforts to phase out the reflationist image gained momentum after US Treasury Secretary Scott Bessent urged Japan to depart from Abenomics, a combination of loose fiscal and monetary policies aimed at combating deflation.