Japan's government has postponed the approval of its economic and fiscal management guidelines, known as the 'Honebuto Policy,' and is revising its wording. The original draft removed the term 'fiscal consolidation' and emphasized cooperation between the government and the Bank of Japan (BOJ), prompting backlash from the market. In response, the government has decided to clarify the independence of the BOJ.
The Nihon Keizai Shimbun reported on July 14 that the Japanese government is delaying the cabinet decision on the Honebuto Policy, which was initially scheduled for around this date, and is adjusting the wording. The Honebuto Policy serves as the government's annual economic management guideline, setting the direction for the next year's budget and economic policy. This will be the first policy crafted under Prime Minister Sanae Takaichi, incorporating the administration's commitment to 'responsible proactive fiscal policy.'
In the draft released at the end of last month, the Takaichi Cabinet removed the phrase 'fiscal consolidation,' which had been included in previous drafts. It emphasized that appropriate monetary policy management by the BOJ is 'very important' and expressed hopes for alignment with government economic policy. The market interpreted this as a signal to restrain the BOJ from further interest rate hikes to support expanded fiscal spending, raising concerns that maintaining low policy rates while increasing fiscal expenditure could exacerbate inflation and weaken the yen.
This backlash followed a sharp rise in Japanese government bond yields after the initial draft was released. The yield on newly issued 10-year government bonds surged to 2.9% on July 9, the highest level in nearly 30 years. The yen also weakened, trading around 162 yen per dollar.
Finance Minister Satsuki Katayama acknowledged during a press conference on July 10 that the market's reaction has been termed the 'Honebuto Shock.' Katsutoshi Inadome, chief strategist at Mitsui Sumitomo Trust Asset Management, noted that the rise in long-term Japanese interest rates has been more pronounced than in the U.S. and South Korea, stating, 'The increase in rates is particularly notable due to unique factors in Japan, and the impact of the Honebuto Shock has been significant.'
In light of the growing backlash, the Japanese government is working to clarify that the market misunderstood the intent of the original draft. Minister of Economic and Fiscal Policy, Minoru Kiyuchi, stated, 'The government's position remains that specific monetary policy tools should be left to the Bank of Japan.' Chief Cabinet Secretary Minoru Kihara also clarified, 'We are not pursuing policies that would recklessly expand fiscal size and undermine market confidence.'
The government is not only providing clarifications but is also revising the wording of the Honebuto Policy. They are considering adding a footnote referencing Article 3 of the Bank of Japan Act, which stipulates the BOJ's monetary policy autonomy, and including the phrase 'achieving stable price increases' in sections related to monetary policy. The original draft only reflected Article 4 of the Bank of Japan Act, which outlines cooperation between the government and the BOJ.
Another reason for the delay in finalizing the Honebuto Policy is the proposed consumption tax cut on food items. The Japanese government plans to reduce the consumption tax rate on food from 8% to 1% for two years starting in April 2027, with a plan to provide a payment equivalent to 1% based on income, effectively bringing the real tax rate to 0%. The ruling Liberal Democratic Party aims to avoid issuing deficit bonds by securing funding through subsidy adjustments and non-tax revenue, but the opposition parties disagree, citing a lack of concrete funding plans.
The issue extends beyond just tax cuts. The Japanese government has also announced a growth strategy to invest a total of 370 trillion yen (approximately $3.4 trillion) in 17 strategic sectors, including artificial intelligence and semiconductors, by 2040. With plans to revise three key security documents by the end of this year, defense spending is also expected to increase starting in the 2027 fiscal year. As tax revenues decrease due to the consumption tax cut while investments in growth industries and defense spending rise, the market is closely monitoring whether the government can balance growth investments with fiscal soundness, especially considering external factors like the situation in the Middle East.
Inadome expressed concern, stating, 'The removal of the term 'fiscal consolidation' is shocking,' and added that there is significant anxiety regarding plans that assume additional expenditures, such as the 370 trillion yen in public-private investment. He suggested that the market should be prepared for potential further interest rate hikes by the BOJ, noting, 'The market is wary of proactive fiscal and monetary policy interventions. Now, when the relationship between the government and the BOJ appears unstable, it is crucial to respond carefully to market conditions.'
* This article has been translated by AI.
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