Economic Policy Management: Market Shows Warnings against Expansionary Fiscal Policy

Editorial

16:22 JST, October 15, 2025

The economic policies proclaimed by Sanae Takaichi, the new president of the ruling Liberal Democratic Party, are buffeting the market. She must break away from deflation-era thinking and advance policies that strengthen the economy.

The yen exchange rate, which had been around ¥147 to the dollar before Takaichi became the LDP president, fell to the ¥153 range last week.

Expectations for expansionary fiscal policy pushed the Nikkei Stock Average to a record high of 48,580 on Oct. 9. However, as Komeito announced its withdrawal from the coalition government, it plunged over 1,500 points at one point on Oct. 14. Long-term interest rates hit 1.7% last week, the highest level in 17 years.

The market has apparently been moving nervously, driven by speculation about new economic policies and the unpredictable political situation.

Takaichi’s fiscal and monetary policies appear to be a revival of the economic policies known as Abenomics that were promoted by former Prime Minister Shinzo Abe.

Takaichi emphasized her intention to expand public and private investment in sectors critical to economic security, such as semiconductors, under the banner of “responsible aggressive fiscal policy.”

She also indicated approval of the increased issuance of deficit-financing government bonds as a measure against high prices.

Takaichi also said it is “the government that bears responsibility” regarding monetary policy, leading to a widespread perception in the market that she is trying to discourage the Bank of Japan from raising interest rates at an early stage.

Wrong prescriptions for the Japanese economy must not be taken.

The challenge during the Abenomics era was to achieve a complete escape from deflation, which had long plagued the Japanese economy.

However, the nation is currently struggling to deal with prolonged inflation. If expansionary fiscal and monetary policy leads to a weaker yen, it will fuel higher prices, dealing a heavy blow to household budgets.

The Bank of Japan has ended its extraordinary monetary easing, ushering in a “world with interest rates.” If fiscal discipline slackens, it could trigger a rise in long-term interest rates, posing the risk of incurring a huge amount of debt and rapidly increasing interest payment costs. The fiscal policies employed during the era of the zero-interest rate cannot be continued.

To restore the strength of Japan’s economy, which has fallen to fourth in the world, what is needed is a growth strategy that boosts corporate investment and promotes human resources development and wage increases. This may also be a challenge Abenomics had left unsolved.

Bearing in mind the election to nominate a new prime minister in the extraordinary Diet session, the ruling and opposition parties are actively maneuvering to secure the most votes. The political vacuum has already lasted for nearly three months since the House of Councillors election in July. Measures against rising prices have stalled, and public dissatisfaction only continues to mount.

The opposition parties lean solely toward tax cut policies without adequately addressing funding sources. Lavish handouts that neglect a growth strategy simply offer a future in which the situation will continue to deteriorate. The ruling and opposition parties should take responsibility for fiscal discipline, promptly stabilize politics and present concrete measures.

(From The Yomiuri Shimbun, Oct. 15, 2025)