TOKYO, Sept 17 (Reuters) - Japanese Prime Minister Sanae Takaichi is set to retain key ministers in a cabinet reshuffle on Thursday, while looking to shore up political support to push through her flagship spending plans amid jittery financial markets.
In her first reshuffle since taking office last October, Takaichi is likely to retain Satsuki Katayama as finance minister, sources have told Reuters, a move that will ensure continuity in Japan's exchange-rate policy.
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.
The reappointment of Katayama, a former finance ministry bureaucrat seen as taking a conservative view on fiscal policy, is likely to be welcomed by bond markets wary of Takaichi's expansionary fiscal approach that could boost debt issuance, analysts say.
"Rather than going for stronger appeal on her policy colour, Takaichi is likely prioritising policy continuity and stability to lay the groundwork for re-appointment in the ruling party leadership race in September next year," said Takahide Kiuchi, an economist at Nomura Research Institute.
Concern over prospects for Japan's worsening finances has sent the yield on the benchmark 10-year Japanese government bond (JGB) to three-decade highs this week, as public debt, at twice the size of its economy, is the largest among advanced nations.
NO INTENTION OF REINING IN BIG SPENDING PLANS
In a sign that she has no intention of reining in her big spending plans, however, Takaichi is also likely to keep her reflationist ally Minoru Kiuchi as economic revitalisation minister, the Yomiuri newspaper said on Thursday.
Such choices highlight the tricky balancing act Takaichi faces. With households smarting from a rising cost of living, she risks hurting her approval ratings by backing down on her pledge to cut tax and boost spending.
But she is also under pressure to heed market calls for fiscal discipline, after her ambitious spending plans and a decision to pursue a two-year tax cut on food items sparked a bond sell-off and criticism from Bessent.
Domestic media have said Takaichi is set to retain 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.
As head of the ruling Liberal Democratic Party (LDP), she also roughly maintained the line-up of party executives on Wednesday in a sign of her focus on political continuity.
Takaichi is expected to give a cabinet post to the LDP's coalition partner Japan Innovation Party, looking to solidify the two parties' policy cooperation.
OPPOSITION SET TO GRILL GOVT ON FUNDING
The new cabinet will head into parliament debate over key fiscal issues such as legislation for a two-year cut in sales tax on food items, with opposition parties expected to grill the administration over how to fund it.
Takaichi's pledge to cap new government bond issuance around 40 trillion yen ($256.1 billion) for the fiscal 2027 budget is already facing scrutiny, with expenditure seen increasing from budget requests that swelled to pandemic-era scale.
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.
($1=156.1700 yen)
(Reporting by Leika Kihara; Editing by Clarence Fernandez)
