The market response to the Takaichi administration's policy of moving away from reflation has been muted, while the yen's momentum has not abated and uncertainty over the rise in long-term interest rates and fiscal management is spreading.
In her October policy speech, Prime Minister Takaichi repeatedly referred to the market, while promising a flexible response to a sharp rise in interest rates in an effort to restore confidence in the financial markets. In reality, however, the market response appears to have been limited.
On 7 October, the yield on long-term government bonds rose to 3.105%, and the yen's downtrend continued. The September remark that "reflationary policy has come to an end" is said to have had little impact on the market.
Many investors have not taken the prime minister's remarks seriously, and concerns are growing that fiscal stimulus, including a cut in the consumption tax on food and gasoline subsidies, will push prices higher. The absence of a cap on new government bond issuance has also been cited as a factor raising concerns about a deterioration in fiscal conditions.
Remarks by Economic and Fiscal Policy Minister Kiuchi in September and the prime minister's answers at a plenary session of the House of Representatives on 8 October have broadened views concerning the Bank of Japan's independence, and observers have pointed to a gap between investors' and the government's understanding of the situation. A review of reflationary policy and the availability of funding are expected to remain key issues.