Takaichi's fiscal messaging needs substance, analysts say

Japan's administration is stepping up efforts to shed its growth-and-easy-money image through a change in rhetoric, a shift analysts say may backfire unless it is matched by action such as substantial cuts to spending. The stakes are set by Japan's debt pile of about USD7 trillion, the largest among advanced economies, at a time when major economies face increased scrutiny from bond investors worried about rising inflation and yields.

According to the source material, Prime Minister Sanae Takaichi has vowed to cap new debt issuance at around 40 trillion yen (USD253 billion), even as spending requests for next year's budget reached a record 143 trillion yen. A planned two-year sales tax cut would cost roughly 4 trillion yen per year. The government hopes to fill the gap by tapping rising tax revenues and state funds, a task analysts describe as difficult and one that would still pump money and inflationary pressures into the economy.

"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." The warning points to the risk that unclear funding plans could trigger another selloff in Japanese government bonds.

Takaichi became premier in October last year with a pledge to ramp up spending to spur growth, and filled government panels with reflationist aides to promote loose fiscal policy. In a policy speech at the time, she said Japan would achieve fiscal sustainability only by strengthening the economy, explaining her plan to compile a big spending package. Hefty fuel subsidies, the tax-cut pledge and large investment plans cemented market perceptions of a reflationary stance as the economy struggled to recover from decades of low growth and low inflation.