Japan's Economic Revitalization Minister, Minoru Kihara, stated that the country's spending plan will provide a long-term boost to the yen, pushing back against market concerns about fiscal sustainability. In an interview on Monday, Kihara said, "Japan's fiscal policy is not as expansionary as many think, because we place a high priority on sustainability." He praised the government's efforts to shift toward using a debt-to-GDP ratio that aligns more closely with "international standards" to measure debt levels.
The comments come after Prime Minister Shigeru Ishiba unveiled a series of spending initiatives aimed at revitalizing Japan's economy, sparking worries about funding sources. Kihara downplayed the burden of Ishiba's unprecedented plan to inject 370 trillion yen (approximately $2.3 trillion) into key sectors over 14 years. He defended the roadmap, which he helped draft, and argued that supporting industries from artificial intelligence and semiconductors to gaming is necessary for national growth. "As investments in Japan and yen-denominated assets increase, demand for the yen naturally rises," Kihara explained.
These remarks were made as the effect of a rare joint U.S.-Japan intervention to strengthen the yen begins to fade. Earlier this month, the yen weakened to a 40-year low near 164 yen against the dollar, prompting the two countries to conduct their first joint yen-buying intervention since 1998. The move briefly pushed the yen to around 155, but the rally has since dissipated, with the yen now trading below 158. This reversal highlights that intervention alone is difficult to reverse the yen's overall downtrend while core factors driving its weakness remain unchanged. Despite warnings from both Japan and the U.S. that they are prepared to act again if needed, factors such as the wide interest rate gap with the U.S., concerns about Japan's fiscal outlook, and geopolitical uncertainty continue to pressure the yen.
Regarding the financing of a two-year consumption tax cut plan, which is expected to cost about 5 trillion yen annually, Kihara said it is not a difficult issue. "Raising 5 trillion yen is not that hard," he noted, pointing out that savings from large-scale reforms to the government's fiscal balance could be used for this purpose. In a brief mention of monetary policy, Kihara said the Bank of Japan (BOJ) is doing well, which, given the growing market expectations for a rate hike in September or October, could indicate he is not strongly opposed to a near-term increase.
Kihara's comments come as market participants remain skeptical about Ishiba's spending plan and the government's influence on the central bank. These concerns were further fueled by the release of the growth strategy draft, a roadmap covering 17 industries published in late June. However, the government has not yet disclosed how much of the investment will come from the public sector. "We won't be investing in producing mangoes or papayas," Kihara said. Instead, investments will target areas where Japan cannot afford to lose global competitiveness, helping to boost productivity, the tax base, and currency strength after years of underinvestment.
Kihara is responsible for drafting this year's annual basic policy for economic and fiscal management (the "Basic Policy"). In this policy, the government aims to reshape national fiscal management by moving from a focus on balancing the primary balance to a debt-to-GDP ratio through multi-year budgeting. The initial draft of the plan triggered negative market reactions, as it gave the impression that the government wanted to influence central bank policy to align with its plans. A strong market backlash led to revisions, including a note emphasizing the central bank's independence. This episode deepened the perception of Kihara, one of the cabinet's most pro-growth members, as favoring the BOJ's delay in raising rates. He has attended the BOJ's monetary policy meetings multiple times to convey the government's views.
Recent signals from the central bank suggest it may be on the verge of accelerating rate hikes. The BOJ's July meeting summary of opinions, released on Monday, contained a series of hawkish comments pointing to faster rate hikes, potentially even larger moves. When asked if he thinks the BOJ is doing a good job, Kihara said, "I think so." Pressed on whether he would support early rate hikes, Kihara referenced his memo on the government's standard stance on monetary policy. "We respect the central bank's independence and leave the method of implementing policy to the BOJ," he said.
Returning to the government's broader goals, he reiterated that Prime Minister Ishiba is trying to achieve two objectives simultaneously: building a strong economy while maintaining fiscal stability. "This is the essence of responsible proactive fiscal policy and the core of this historic shift," he said.
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