Prime Minister Sanae Takaichi has retained key ministers in a Cabinet reshuffle, including her reflationist ally Minoru Kiuchi as economy minister, pointing to no change to her flagship spending plans.
Takaichi’s policies have proven contentious given the huge size of Japan’s public debt.
Her decision to pursue a two-year tax cut on food items sparked a bond sell-off as well as criticism from the United States, putting her under pressure to heed market calls for fiscal discipline.
Kiuchi said after the announcement of the Cabinet line-up yesterday that he would strive towards achieving both a strong economy and fiscal sustainability.
“We won’t engage in wanton fiscal expansion,” he said, adding that he will strive to dispel any concern markets had over Takaichi’s policies.
In her first reshuffle since taking office last October, Takaichi, however, also retained as finance minister Satsuki Katayama – a former finance ministry bureaucrat regarded as having a conservative stance towards fiscal policy.
That reappointment is likely to be welcomed by bond markets wary of Takaichi’s plans to increase government spending which, in turn, could boost debt issuance.
“Markets are getting sensitive to fiscal risks, so stabilising long-term interest rates is turning into a very important challenge for Japan’s economic growth,” said Keiji Kanda, a senior economist at the Daiwa Institute of Research.
“That’s probably why Takaichi decided to retain many of the Cabinet members she trusts, such as Katayama. That would allow her to proceed steadily with steps taken so far and focus on guiding fiscal policy stably.”
Katayama played a key role negotiating with US Treasury Secretary Scott Bessent on a rare joint US-Japan yen intervention in late July, an effort that underscored the countries’ close cooperation and her reappointment underscores continuity in foreign exchange policy.
Other key ministers, including some of her competitors in last year’s race to lead the ruling party, such as Foreign Minister Toshimitsu Motegi and Defence Minister Shinjiro Koizumi, saw no change in their posts.
The reshuffle was aimed mostly at having the Japan Innovation Party, Takaichi’s ruling Liberal Democratic Party’s coalition partner, share responsibility on policy-making by joining the Cabinet.
The premier appointed Hiroshi Nakatsuka from the party as minister in charge of deregulation.
Of the 18 minister posts, eight were filled by incumbents including trade minister Ryosei Akazawa, who oversees Japan’s trade negotiations with the US.
The yield on the benchmark 10-year Japanese government bond hit three-decade highs this week on concerns that Takaichi’s big spending plans could add to Japan’s public debt which, at twice the size of its economy, is the largest among advanced nations.
But with households smarting from rising costs of living, she risks hurting her approval ratings by backing down on her pledge to cut tax and boost spending.
Takaichi’s pledge to cap new government bond issuance around 40 trillion yen (RM1.04 trillion) for the fiscal 2027 budget is already facing scrutiny after budget requests swelled to pandemic-era levels.
Japan also faces the prospects of higher defence spending in a strategy review this year.
The cost of funding Japan’s debt is increasing as the central bank raises interest rates and slows bond purchases in an effort to wean the economy off decades of massive stimulus.
The Bank of Japan is widely expected to hike its main policy rate by 25 basis points to 1.25% today. — Reuters
