Japan's yen has fallen to 163 against the US dollar, a four-decade low, as investors recoil from Sanae Takaichi's ¥370tn spending plan. Japanese government bond yields have climbed to 2.8%, the highest in 29 years, with markets questioning how the unfunded programme will be paid for.
The yen has slid to 163 against the US dollar, a four-decade low, as international investors back away from Sanae Takaichi's plan to inject ¥370tn (£1.7tn) into 17 industrial sectors by 2040. Many in the prime minister's own party fear the unfunded programme could trigger a Liz Truss-style shock.
Why the yen is sliding
Waning international support for Japan's economic outlook has weighed on the currency, and Takaichi's boldness has since acted as a heavy weight pushing it to the 163 low. Domestic and international lenders have meanwhile pushed the interest rate on Japanese government bonds to 2.8%, the highest in 29 years.
A weaker currency raises the price of imported energy and raw materials, which feeds inflation. Japan's core inflation has stayed below the Bank of Japan's 2% target for the past four months. Even so, analysts expect a jump to the mid-2% range on higher oil prices following the Iran war.
What markets fear
The Bank of Japan has raised its policy rate to a 31-year high of 1%, still low relative to its peers. Since 2022 the finance ministry has spent about £160bn to limit the yen's decline. Kelvin Lam of Pantheon Macroeconomics said the real fear is the lack of detail on financing, leaving Japan, in his words, "on course for a Liz Truss moment".
The plan behind the sell-off
Takaichi says the investment will lift the economy's productive capacity, keep Japan at the forefront of the AI revolution, and reduce its dependence on trade with China. The scheme targets AI, semiconductors, biotech, defence, energy and shipbuilding, aiming to more than double economic growth to above 1%.
But economists are sceptical. Forecasters point to growth of 0.93% in 2027 and 0.85% in 2028, short of the 1% target, according to the Japan Center for Economic Research.
The stock market has stepped down since the proposals were unveiled in June, hitting shares in Sony and Toyota. Exports rose 20% year-on-year in June, but after the yen's depreciation the value of that gain was almost zero.
Source: The Guardian
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