By Leika Kihara
TOKYO, July 21 (Reuters) – Japanese Prime Minister Sanae Takaichi vowed to boost investment in growth areas in her first economic blueprint finalised on Tuesday, a pledge overshadowed by rising bond yields reflecting concerns that the government could meddle in monetary policy.
Takaichi’s administration has struggled to shed market perceptions it could ramp up spending and pressure the Bank of Japan (BOJ) to delay interest rate hikes to curb the cost of funding Japan’s already huge debt.
As government bond yields crept up to multi-decade highs since June, the administration was forced to tweak the blueprint’s language on monetary policy several times.
A phrase in an early draft calling for monetary policy “that bolsters private demand” disappeared as long-term rates rose.
REVISIONS MADE TO CLARIFY BOJ SETS POLICY
After a later version tying monetary policy to government efforts to boost growth jolted markets, revisions were made to clarify that the central bank sets policy “to achieve stable price rises.”
The final blueprint retained language urging the BOJ to align its policy with that of the government, but inserted a footnote referring to a clause in law stipulating the need to protect the BOJ’s independence in setting policy.
“To achieve a strong economy, it is very important for monetary policy to be conducted appropriately to see stable price rises,” said the final blueprint, which was approved by the cabinet on Tuesday.
Japan’s law grants the central bank independence from political interference, but also requires close coordination with the government’s economic policy.
VOWS TO BOOST INVESTMENT
Takaichi is known as a fan of “Abenomics,” a mix of big fiscal spending and monetary easing via massive bond issuance deployed by former premier Shinzo Abe to pull Japan out of prolonged deflation.
“Under the Takaichi administration, the government will take the initiative and, together with the private sector, invest in strategic areas, thereby ending the trend of under-investment that has mired Japan,” the blueprint said.
Japan will seek to work with the private sector to channel resources into strategic industries, with combined public and private investment projected to exceed 370 trillion yen ($2.28 trillion) through fiscal 2040, it said.
Ditching language used in previous administrations pledging to restore fiscal health, Takaichi’s blueprint vowed to balance the need to boost growth and achieve “fiscal sustainability.”
Since taking office in October, Takaichi has vowed to boost spending to revitalise the economy. Her administration has also signalled reservations over the BOJ’s interest rate hikes.
The focus on big spending and low rates has pushed up bond yields on market concern Japan could see its already tattered finances worsen and be too late in dealing with inflation risks.
After hitting a three-decade high of 2.9% on July 9, the yield on the benchmark 10-year Japanese government bond (JGB) retreated somewhat and stood at 2.73% on Tuesday.
“We’ve guided economic and fiscal policy paying due heed to fiscal sustainability and the need to maintain market trust. We will continue to do so based on this blueprint,” Takaichi said on Tuesday in a meeting of a panel debating the blueprint.
But some analysts say tweaks in language alone would do little to alleviate market concerns over Takaichi’s policies.
“The administration wants the BOJ to keep rates low so that it can issue more debt,” said former BOJ board member Seiji Adachi. “That’s not a good message to send to markets.”
The BOJ exited an aggressive stimulus programme in 2024 and hiked interest rates several times including in June. It has signalled its readiness to keep raising its policy rate, which, at 1%, is still low compared to other advanced economies.
($1 = 162.5100 yen)
(Reporting by Leika Kihara; additional reporting by Kentaro Sugiyama; Editing by Jacqueline Wong)
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