What are the key points of Prime Minister Takaichi’s policy speech? Expected risks and market reaction (Atago Nobuyasu (愛宕伸康))

On the afternoon of 5 October, Prime Minister Takaichi (高市 早苗) delivered a policy speech at the opening of a plenary session of the House of Representatives, setting out a policy of increasing domestic investment and raising potential growth to achieve a "virtuous cycle under GDP expansion," in which employment, income, consumption and tax revenue all increase simultaneously. The policy thinking shown in Figure 1 was presented as the core of the speech. Going forward, the feasibility of fiscal policy and the timing of its effects are expected to be key focuses.

The speech also pointed to side effects concerning risks and the market reaction. Even assuming that fiscal expansion raises potential growth, it may take time for the effects to emerge, creating a risk that inflation will come first. This was said to potentially lead to higher long-term yields and further yen depreciation. The possibility that a widening Japan-US real interest-rate differential could affect the yen was also mentioned.

The consistency of the policy with BOJ monetary policy was also addressed. If inflation risks increase, monetary policy operations could be affected, and flexible measures to contain price increases, together with consideration of foreign exchange movements, were identified as challenges. The outlook for the timing of the next rate hike and the possibility of additional rate hikes every 3 months were also mentioned.

In summary, the focus will be on how movements in nominal wages and prices interact with real wages and labour productivity. With real wages remaining weak, the key question is whether the effects of fiscal spending can raise labour productivity. Policy direction may change depending on future economic indicators while the market reaction is assessed.