Prime Minister Sanae Takaichi delivered a policy speech at the opening of the House of Representatives plenary session on the afternoon of October 5, setting out a direction of "responsible proactive fiscal policy" aimed at increasing domestic investment to raise the potential growth rate and achieving a "virtuous cycle under GDP expansion" in which employment, income, consumption, and tax revenue all rise together. Nobuyasu Atago of Rakuten Securities said the policy direction itself is not wrong, but pointed out that attempting to achieve it through aggressive fiscal policy risks creating a mismatch with market perceptions and reactions. It takes considerable time for fiscal policy effects to materialize, and in the meantime the side effect of inflation rising more than expected can be anticipated; if inflation risk intensifies, long-term interest rates will rise, and if the real interest rate gap between Japan and the United States widens, the yen could weaken further. Because real wages are determined by labor productivity, expanding fiscal spending without raising labor productivity could end up as a case of "racing the engine" in which real wages remain sluggish while only inflation rises. In the two most recent years, 2024 and 2025, the inflation rate was around 3 percent and nominal employee compensation grew 3.8 percent, while real employee compensation at 0.7 percent and labor productivity at 0.6 percent both continued to languish. The Tokyo ward-area consumer price index for September, released by the Ministry of Internal Affairs and Communications on October 2, showed the core measure excluding fresh food and energy up 3.0 percent year on year, a sharp acceleration from 2.0 percent in August. The Bank of Japan's next rate hike is seen coming on December 17-18, but after that it may be necessary to keep additional hikes at a pace of once every three months in view.
Proactive fiscal spending risks higher inflation and wider Japan-US real rate gap, which the article says could weaken the yen further.
