Japan’s new prime minister is setting up a potential policy clash with the country’s central bank, as both sides weigh how fast to move in reshaping the world’s third-largest economy. Sanae Takaichi has outlined plans to replace Japan’s annual primary budget balance target with a looser, multi-year goal. She says the new structure, which her cabinet will start to design early next year, will give her more room to boost spending.
Since taking office in late October, she has emphasized growth over fiscal tightening and has floated the possibility of cutting the national sales tax. Her government is also preparing measures to ease the strain of rising living costs and expand investment in industries seen as critical to Japan’s future, including defense.
Economists warn this direction may put Japan’s long-stated goal of reaching a primary budget surplus by fiscal 2025–26 further out of reach. The central bank’s path is also becoming more complicated.
Pressure builds on BOJ
Takaichi has urged the Bank of Japan to be cautious with interest rate increases, arguing the focus should be on supporting demand and achieving stable inflation driven by higher wages. That message contrasts with recent signals from BOJ policymakers, who say the conditions for another rate increase are nearly in place.
A record of the BOJ’s October meeting showed a growing willingness to tighten policy after keeping the key rate at 0.5 percent. Governor Kazuo Ueda has hinted a hike could come as early as December or January, especially if wage talks maintain last year’s strong momentum. Labor leaders are again aiming for sizable pay increases, building on the largest jump in more than three decades.
Markets are watching closely for Ueda’s first formal meeting with Takaichi. The yen weakened to around 153.8 per dollar after the BOJ summary, reflecting expectations that higher borrowing costs are nearing.
