On October 5, Japanese Prime Minister Sanae Takaichi stated during a parliamentary speech that while the government plans to reduce the food consumption tax and provide support to low- and middle-income households, it will not rely on deficit bonds for funding. The plan aims to decrease tax revenue while increasing spending, all while maintaining fiscal sustainability. Takaichi emphasized the importance of securing market trust, mentioning the term 'market' five times, but did not provide specific figures or limits on new bond issuance.
According to the Yomiuri Shimbun on October 6, Takaichi expressed in her speech that she wants to 'ease the burden on households' through the reduction of the food consumption tax and income-linked support payments. The government plans to lower the food consumption tax rate to 1% for two years starting in April 2027 and aims to pass related legislation during the current extraordinary session of the Diet, which runs until December 12. The speech is a traditional address by the Prime Minister outlining the government's basic policies at the opening of the extraordinary session, with about 60% of her remarks dedicated to economic and fiscal policy.
The Nikkei reported that the term 'market' appeared five times in this speech, compared to once in her inaugural address last October and twice in her policy speech in February. Takaichi stated, 'I will enhance the market's trust in the government through straightforward methods.' She emphasized that fiscal sustainability is 'a given' and pledged to appropriately control annual bond issuance by comprehensively reviewing the economy, prices, tax revenue, interest rates, interest costs, and market conditions. The Yomiuri noted that this commitment to controlling bond issuance was not mentioned in her February speech. She also indicated that if the economy or market deviates from expectations, 'necessary measures will be taken promptly.'
However, the term 'fiscal stimulus,' which she used in her previous two speeches, was absent this time. Last October, she stated, 'We will strategically inject fiscal resources,' and in February, she stressed the need for fiscal stimulus to support economic growth. This time, she clarified, 'The government is not simply increasing spending,' asserting that she aims to achieve both a strong economy and fiscal sustainability. The Nikkei interpreted this as a message against a one-sided focus on increased spending.
The Nikkei also reported growing concerns in the financial markets regarding Takaichi's fiscal policy, with the U.S. applying pressure as well. Japan's long-term interest rates rose above 3% for the first time in 30 years last month. The Yomiuri pointed out that concerns about the expansionary nature of Takaichi's fiscal policy are seen as a factor contributing to rising interest rates. Recently, U.S. Treasury Secretary Janet Yellen and President Donald Trump have both raised issues regarding Japan's expansionary fiscal policy and the depreciation of the yen.
However, how the government will secure funding for the tax cuts and support remains unclear. According to the Asahi Shimbun on October 6, implementing the food consumption tax cut and support payments is expected to reduce annual tax revenue by approximately 5 trillion yen (about $42.5 billion). Takaichi stated that she would secure funding 'without relying on deficit bonds,' but did not present specific plans. She added, 'There is no need for concern.'
With the funding for tax cuts and support still uncertain, there is also interest in how much new debt will be issued. Takaichi did not specify a limit in her speech. In an interview with the Yomiuri in August, she mentioned managing bond issuance at around 40 trillion yen after the supplementary budget for the 2025 fiscal year, indicating that she would continue similar efforts. The Nikkei reported that the market also views approximately 40 trillion yen as a benchmark.
The Nikkei noted that the absence of a specified limit for new bond issuance may be due to the need to finalize the budget amid plans for tax cuts, growth investments, and increased defense spending at the end of the year. A Japanese government official described the situation as 'like triple booking,' trying to allocate the same funding for tax cuts, growth investments, and defense spending.
The Nikkei concluded that Takaichi's speech alone is unlikely to alleviate the concerns of bond investors worried about fiscal deterioration. In fact, on the same day, the Japanese Ministry of Finance announced an increase in the coupon rate for 10-year bonds being issued this month from 2.7% to 3.1%. As bond yields have been rising amid a recent trend of weak bonds, the coupon rate was adjusted accordingly. Kazuhiko Sano, chief bond strategist at Tokai Tokyo Securities, stated, 'The bond market looks at numbers, not words,' emphasizing the importance of the figures presented in the budget and bond issuance plans.
Meanwhile, Takaichi also emphasized dialogue with China in the realm of foreign affairs. She described China as 'an important neighboring country' and acknowledged that 'there are various challenges, but we have a long-standing relationship.' This statement is seen as an indication of her intention to prioritize dialogue to improve Japan-China relations, which have soured since her remarks in the Diet regarding Taiwan last November. However, Takaichi also stated, 'I will assert our claims and demand responsible actions strongly.' The Asahi Shimbun predicted that the focus will be on whether Takaichi and Chinese President Xi Jinping will meet ahead of the Asia-Pacific Economic Cooperation (APEC) summit in Shenzhen, China, in November.
Regarding South Korea, she described it as 'an important neighboring country' and expressed her intention to strengthen relations across a wide range of areas, including security and the economy, through shuttle diplomacy, including trilateral cooperation with the U.S.
* This article has been translated by AI.
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