Japanese Prime Minister Sanae Takaichi signaled that her government may issue deficit-covering bonds to fund planned tax cuts. Appearing before the budget committee of the House of Councillors, the upper house of parliament, on the 19th, Takaichi was asked how the government would pay for a two-year reduction in the consumption tax rate on food that takes effect next April. The government will "appropriately control the volume of bond issuance," she said, adding, "That does not mean we are ruling out issuing bonds." The remarks mark a shift from her earlier position that the funding would come solely from restructuring expenditures.
The consumption tax cut and an income-linked benefit program are expected to cost about 10 trillion yen (about 84 trillion won) over two years. Japan's national debt stood at 204.4% of gross domestic product as of last year, the highest among major advanced economies. Increasing deficit-bond issuance to finance tax cuts could stoke concerns over fiscal soundness, which in turn could push the yen lower and bond yields higher.
The Takaichi government, which marks its first anniversary on the 21st of this month, has pointed to gains in wages, capital investment and stock prices as its economic achievements. Real wages have risen from a year earlier for eight consecutive months, and capital investment by private companies reached a record 129 trillion yen last year. The Nikkei Stock Average at one point topped 70,000, more than 30% higher than a year earlier.
The bill, however, came due in the bond and currency markets. Japan's long-term interest rate climbed from around 1.6% when the government took office to above 3% in September this year. The yen weakened from around 151 per dollar to as low as about 163 at one point, and it remains above 160 even after joint U.S.-Japan intervention in the currency market. At a summit in September, U.S. President Donald Trump expressed dissatisfaction with the weak yen.
The Nikkei newspaper reported that each time Takaichi has laid out specifics of her "responsible expansionary fiscal policy," including the consumption tax cut and public-private investment, the response has been higher long-term rates and a weaker yen. In parliament that day, Takaichi said she rejects the terms "Takaichi yen weakness" and "Takaichi high rates," adding that "a strong economy and fiscal sustainability are not an either-or choice."