Long-term Boost for the Yen? Japanese Minister: 370 Trillion Yen Investment Plan Will Strongly Stimulate the Yen

According to Zhitong Finance APP, Japan's Minister for Economic Revitalization, Minoru Kihonai, has stated that Japan's spending plans will provide long-term support for the yen, countering market concerns over the country's fiscal situation.

In an interview on Monday, Minoru Kihonai said, "Japan's fiscal policy is not as expansionary as people imagine, because we place great importance on sustainability." He praised the government's efforts to use debt-to-GDP ratio, more in line with "international standards," as a measure of debt levels.

Japanese Prime Minister Sanae Takahashi announced a series of spending plans aimed at revitalizing Japan's economy, which have raised market concerns about their funding sources.

Regarding concerns over the unprecedented plan proposed by Sanae Takahashi to inject 370 trillion yen (about $2.3 trillion) into key areas over 14 years, Minoru Kihonai downplayed the burden it would bring. He defended the roadmap he helped draft and said that supporting industries from artificial intelligence and semiconductors to gaming was necessary for the country's growth.

Minoru Kihonai explained, "As investments in Japan and yen-denominated assets increase, demand for the yen will naturally rise." His comments come as the rare joint intervention by Japan and the U.S. to strengthen the yen is beginning to fade.

At the beginning of this month, the yen dropped to a 40-year low near 164 against the dollar, after which Japan and the U.S. jointly intervened to buy yen for the first time since 1998. The operation pushed the yen up to around 155, but the gains have since gradually faded, and the yen has now fallen below the 158 threshold.

This reversal highlights that, with the core factors leading to the yen's weakness unchanged, intervention alone is unlikely to reverse the yen's overall downward trend. Despite warnings from both Japan and the U.S. that they are prepared to act again if necessary, the massive interest rate differential with the U.S., market concerns about Japan's fiscal outlook, and geopolitical uncertainties continue to weigh on the yen.

Regarding the funding for a two-year consumption tax cut plan expected to cost about 5 trillion yen per year, he said it's not that difficult. "Raising 5 trillion yen is not that hard," he noted, adding that savings from major reforms to government finances could be used for this purpose.

Briefly mentioning monetary policy, Minoru Kihonai stated that the Bank of Japan is doing well. Given that expectations for a rate hike in September or October continue to rise, this may indicate that he does not strongly oppose a near-term rate hike.

Minoru Kihonai made these remarks as market participants continue to doubt Sanae Takahashi's spending plans and the government's influence on the central bank. These concerns intensified after the publication of the draft growth strategy.

The roadmap, released in late June, covers 17 industries. However, the government has yet to disclose how much of the investment will come from the public sector.

"We are not going to invest in producing mangoes or papayas," Minoru Kihonai said. Instead, investments will be directed toward sectors in which Japan cannot afford to lose global competitiveness, aiming to enhance Japan's productivity, tax base, and currency strength after years of underinvestment.

Minoru Kihonai is responsible for formulating this year's annual Basic Policy on Economic and Fiscal Management (Honebuto Policy). In this policy, the government aims to reshape the country's fiscal management through multi-year budgets and a shift in focus from balancing the Primary Balance to the debt-to-GDP ratio.

The initial draft of the plan provoked a negative market reaction because it gave the impression that the government wanted to influence central bank policy to align with its own plans. The strong backlash led to revisions, including a note emphasizing the independence of the central bank.

This episode deepened perceptions of Minoru Kihonai as one of the cabinet's most growth-oriented members and someone who favors the Bank of Japan holding off on rate hikes. He has frequently attended central bank monetary policy meetings to express the government's views.

The Bank of Japan's latest signals suggest that it may soon accelerate rate hikes. The summary of opinions from the July BOJ meeting released on Monday contained a series of hawkish comments pointing to a faster pace of hikes and even the possibility of more significant moves.

When asked if he thought the Bank of Japan was doing well, Minoru Kihonai said, "I think so." When pressed on early rate hikes, Minoru Kihonai referred to his memorandum on the government's standard stance on monetary policy.

"We respect the independence of the central bank and leave the implementation of policy to the Bank of Japan," he said.

Returning to the government's broader goals, he reiterated that Sanae Takahashi is trying to achieve two objectives simultaneously: building a strong economy while maintaining fiscal stability. He stated, "This is the essence of responsible and proactive fiscal policy, and it's at the heart of this historic transformation."