Japan’s Takaichi outlines fiscal shift, food tax suspension plan

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Japan Prime Minister Sanae Takaichi said on Monday that her government is pushing for a shift toward a more proactive fiscal stance, including a temporary suspension of the sales tax on food.

Japan Prime Minister Sanae Takaichi said on Monday that her government is pushing for a shift toward a more proactive fiscal stance, including a temporary suspension of the sales tax on food. She also emphasized the need to boost investment and signaled plans for diplomatic engagement with the United States, according to Reuters.

Meanwhile, Takaichi stressed that the administration would avoid debt issuance to finance the proposed tax measures and instead seek alternative revenue sources.

Key quotes from Takaichi

Will examine at meeting among ruling, opposition parties schedule and funding of plan to suspend by two years sales tax on food.

Will not resort to debt issuance to fund suspension of sales tax on food.

Will seek achievement of food sales tax suspension at earliest date possible by securing revenues such as through non-tax revenues, reviews to subsidies.

Hope to visit U.S., hold talks with US President Trump next month.

Must pull Japan out of excessively tight fiscal policy, lack of investment.

Govt must take bold steps to promote public-private investment on crisis management, state-of-art technology.

Proactive fiscal policy will be key component of Takaichi administration's policy transition.

Market reaction

At the time of writing, Japanese Yen showed limited immediate reaction, with investors assessing the feasibility and funding details of the proposed fiscal measures. The USD/JPY pair is down 0.41% on the day at 156.43.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

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One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

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The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.