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

TOKYO: 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 USD7 trillion debt pile that is the biggest among advanced nations. Takaichi vowed to cap new debt issuance around 40 trillion yen (USD253 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.