TOKYO, Feb 5 — Japan must be careful not to push fiscal spending too far, as doing so could drive inflation higher and force the central bank to hike interest rates sharply,
Toshihiro Nagahama, a government panel member and economic adviser to Prime Minister Sanae Takaichi, said on Thursday.
His comments come as officials remain alert to the danger of another bond market selloff, following last month’s spike in super-long Japanese government bond yields after Takaichi pledged to suspend a food sales levy for two years. That proposal rattled investors and sent yields to record levels, highlighting market sensitivity around Japan’s fragile finances.
Balancing Fiscal Discipline with Strategic Investment in Japan
Nagahama defended the government’s current spending approach, saying the administration is focused on strategic investment, especially in areas such as artificial intelligence, aimed at lifting Japan’s long-term growth potential while gradually improving its debt-to-GDP ratio.
“The Takaichi administration is pursuing proactive fiscal policy together with fiscal discipline, and will not take reckless steps that could disrupt markets,” Nagahama said, noting that policy decisions are being made with caution despite pressure to boost growth.
He also stressed the importance of clear communication with financial markets and the Bank of Japan, warning that poor coordination could trigger a weaker yen or sudden jumps in long-term interest rates.
“If fiscal policy becomes overly expansionary, it would speed up inflation and force the BOJ to raise rates too quickly,” Nagahama said. “That’s why fiscal management must stay balanced-neither too loose nor too tight so interest rates can rise gradually and economic shocks are kept to a minimum.”
Nagahama added that the government should improve transparency around its debt issuance plans and maintain close dialogue with major buyers of Japanese government bonds, including megabanks and domestic life insurers, to prevent renewed selling pressure.
Bond investors remain nervous as polls suggest Takaichi’s party could win a landslide victory in Sunday’s election, potentially giving her a strong mandate to pursue expansionary fiscal policies. This has heightened concerns over Japan’s already heavy debt burden.
Some investors also argue the BOJ has been slow to respond to persistent inflation risks. While the central bank raised its short-term policy rate to 0.75% in December and signaled further tightening, real borrowing costs remain deeply negative, with inflation staying above the BOJ’s 2% target for nearly four years.
Nagahama, who is chief economist at Dai-ichi Life Research Institute, now serves on a key economic council responsible for shaping Japan’s long-term fiscal strategy. Alongside former BOJ Deputy Governor Masazumi Wakatabe, he is known as a supporter of former Prime Minister Shinzo Abe’s “Abenomics” stimulus policies and has previously encouraged Takaichi to roll out large spending packages to support growth.
Source: Reuters