Japan’s Takaichi urges to boost capacity with proactive fiscal policy

Lallalit Srijandorn FXStreet

Japanese Prime Minister Sanae Takaichi on Wednesday emphasized the need for proactive fiscal policy to strengthen Japan's capabilities, rather than excessive fiscal tightening.

Key quotes

What's necessary for Japan now is to strengthen its capacity with proactive fiscal policy, not excessive fiscal tightening.

We will achieve sustainable fiscal policy, social welfare system by reflating economy, improving corporate profits, increase household income via wage gains that then boosts tax revenues.

What we foresee is strategic fiscal spending, not reckless expansion.

Elsewhere, former BoJ deputy governor, Masazumi Wakatabe stated that Japan must raise neutral rate of interest via fiscal policy, growth strategy.

Neutral interest rate will rise if demand for funds increase.

If Japan's neutral rate rises as a result of fiscal policy, growth strategy, it would be natural for BoJ to raise interest rates.

BoJ should avoid premature rate hike, excessive adjustment of monetary support in light of neutral rate level.

Sanaenomics carries over elements of abenomics but focuses more on strengthening supply side of economy.

Market reaction

The USD/JPY pair is gaining 0.24% on the day to trade at 155.17 at the press time.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

How does broader risk sentiment impact the Japanese Yen?

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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