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Japan PM Takaichi: We must exit from excessively tight fiscal policy

Japan Prime Minister (PM) Sanae Takaichi said during the European trading session on Monday that the economy needs to exit from fiscal tightness. However, she clarified that there won’t be reckless fiscal spending, as higher government expenditure will be backed by expanding Gross Domestic Product (GDP)-driven tax revenue.

Remarks

Japan's inflation, at 1.7%, is the lowest among G7 countries, with bright signs appearing in the wage outlook.

Japan's economy is starting to pick up momentum.

Japan must exit excessively tight fiscal policy, boost domestic investment, and put the economy on a growth path.

Japan will lose the chance to grow if we put off investment for the future.

Breaking away from years of excessive austerity.

Will submit bill for lowering 8% sales tax on food once meeting among lawmakers to debate the issue reaches an agreement.

Will lose growth chances if we postpone investment.

We will seek to increase tax revenue by expanding GDP, won't resort to reckless fiscal spending.

Important to set out fiscal target and how to achieve it.

Cutting number of lawmakers is the LDP election pledge.

Won't be swayed by fluctuations in opinion polls.

Impact of price relief measures to be felt gradually.

Watching the Middle East situation closely.

Can't say Japan has exited deflation fully.

Japan is no longer in deflation, if deflation is defined as sustained price declines, as CPI and GDP deflator are in an uptrend.

Japan hasn't met the conditions for the government to declare an end to deflation, which is defined as a state where there is no risk of the economy returning to deflation.

Market reaction

No major impact was seen in the Japanese Yen (JPY) following remarks from Japan PM Takaichi. At press time, USD/JPY trades 0.15% lower to near 163.60.

Japanese Yen FAQs

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

Author

Sagar Dua

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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