Prime Minister Sanae Takaichi stated at a plenary session of the House of Representatives on October 8, 2026, that the current Japanese economy is in the process of overcoming deflation, declaring that “this is not a phase where reflationary policies are necessary.” Behind this stance is an aim to dispel market caution regarding concerns over increased government bond issuance associated with “responsible proactive fiscal policy,” rising long-term interest rates, and potential spillover effects on the foreign exchange and international financial markets.

The True Intent and Background of the Remarks on “Moving Away from Reflation” Expressed in the Representative Questions

On October 8, 2026, Prime Minister Sanae Takaichi clearly stated in response to questions from Democratic Party for People (DPP) leader Yuichiro Tamaki and others at a plenary session of the House of Representatives, “We are not in a situation of deflation in the sense of a sustained decline in prices, and this is not a phase where so-called reflationary policies are necessary.” She also asserted that her own economic policies are “different from conventional reflationary policies,” emphasizing her stance of respecting the independence of the Bank of Japan to the maximum extent possible. While Finance Minister Satsuki Katayama and Minister of State for Economic and Fiscal Policy Minoru Kiuchi had previously expressed views such as “the government is not adopting reflationary policies” and “reflationary policies are over,” the fact that the prime minister herself, the head of the administration, made this public statement in the Diet has made the government’s policy message even clearer. As the Japanese economy breaks away from years of deflation and transitions into a mild inflationary environment, the validity of demand-stimulation measures centered on massive money supply and monetary easing has been called into question. It is believed that the administration intended to highlight a turning point in its policies by breaking away from conventional methods of escaping deflation and signaling an approach to achieving growth through strengthening supply capacity and expanding domestic investment.

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Discussions on the Continuation of “Responsible Expansionary Fiscal Policy” and Policy Consistency

Meanwhile, Prime Minister Takaichi has indicated an intention to maintain the basic line of her signature policy, “responsible proactive fiscal policy.” This is a growth-oriented framework aimed at creating a virtuous economic cycle through the expansion of domestic investment and the creation of jobs and income, ultimately resulting in increased tax revenues. However, among economic experts and market participants, there are strong voices questioning the policy consistency of continuing to promote an active fiscal policy while rejecting reflationary policies. This is because, unlike the deflationary period when demand was insufficient, fiscal stimulus amid inflation risks inviting further upward pressure on prices. Furthermore, amid discussions on increased spending and tax-cut measures, such as a proposal to suspend the temporary 8% consumption tax rate on food and beverages for two years, concerns over fiscal deterioration due to increased government bond issuance have not been dispelled. Since market credibility is not gained through declarations, but rather judged by consistency and discipline in actual policy management, there is a strong demand for a concrete roadmap toward future expenditure restraint and fiscal consolidation.

Financial Market Trends and Their Impact on Government Bond and Foreign Exchange Markets

Surge in Long-Term Interest Rates and Growing Concerns in the Bond Market

Uncertainties surrounding the Takaichi administration’s proactive fiscal policy and reflationary stance are having a serious impact on Japan’s bond market. On January 20, 2026, the yield on 40-year Japanese Government Bonds surged from the previous day’s 3.94% to 4.2%, breaking the 4% threshold for the first time in history. Additionally, the 10-year government bond yield rose from 2.865% to around the 3% level, marking a high not seen in about 30 years. Rising interest rates mean falling bond prices, and concerns among market participants rapidly mounted regarding the fiscal sustainability of Japan, which shoulders a massive government debt. The market had also been wary of the risk of being “behind the curve,” where the government strongly urges the Bank of Japan to maintain low rates and appropriate rate hikes are delayed. The backdrop to Prime Minister Takaichi clearly rejecting reflationary policies during a plenary session and emphasizing respect for the BOJ’s independence was a desperate intention to calm such volatility in the bond market and alleviate distrust in fiscal discipline.

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Spillover Effects on Global Markets and Caution Among Overseas Investors

Rapid fluctuations in Japanese government bond (JGB) yields have had significant ripple effects not only domestically but also on global financial markets. As the world’s largest net creditor nation, Japan had seen massive amounts of capital flow into overseas stock and bond markets through yen carry trades utilizing low-interest-rate yen. However, the sharp rise in domestic long-term interest rates sparked concerns over a potential repatriation of funds staying abroad back into JGBs and the unwinding of leveraged investment positions. In fact, in the U.S. market, the 30-year Treasury yield rose from 4.84% to 4.9%, acting as upward pressure on global interest rates. Furthermore, concerns expressed by U.S. President Trump and Treasury Secretary Bessent regarding excessive yen depreciation and Japan’s monetary and fiscal policies during events such as the September 2026 U.S.-Japan summit served as strong external pressure on the Japanese government. The administration’s explicit rejection of reflationary policies was also an essential measure to prevent turmoil in international financial markets and maintain relations with overseas authorities.

The Independence of the Bank of Japan and Future Economic and Policy Outlook

Bank of Japan Monetary Policy Decisions and the Effective Securing of Independence

Following the raise of the policy interest rate to 1% in June 2026, the Bank of Japan further raised the policy rate in a phased manner to around 1.25% at the Monetary Policy Meeting in September of the same year. Governor Kazuo Ueda cited the moderate recovery of the Japanese economy, driven by increasing AI demand and improved employment, as well as the underlying inflation rate approaching the 2% target, as the reasons for the move. While signaling an attitude of appropriately adjusting the degree of monetary easing while closely monitoring upside risks to prices, the focal point of policy is shifting from stimulating demand to curbing inflation. With the government respecting the BOJ’s independence and clarifying a hands-off stance toward monetary policy, an environment is falling into place where the BOJ can easily implement agile rate hikes. However, strict market monitoring continues regarding whether the independence of the BOJ is substantially guaranteed, given points such as expressions demanding policy consistency remaining in the government’s basic policy draft and the handling of Japanese government bond purchases.

Key Points to Watch for Price Stability and Fiscal Consolidation Moving Forward

The biggest challenge for the future Japanese economy is balancing price stability with sustainable fiscal management. At the Council on Economic and Fiscal Policy held in September 2026, discussions were held on the importance of breaking away from a chronic reliance on supplementary budgets and securing market confidence through multi-year expenditure management and a stable decline in the debt-to-GDP ratio. This is because a rising interest rate environment constantly carries the risk of increasing the government’s burden of interest payments on bonds and rigidifying fiscal management. Meanwhile, on the household side, while there is the positive aspect of increased interest income from deposits, rising mortgage rates and soaring food prices are weighing heavily on consumers, creating a need for meticulous living support measures and creative tax policies. Whether the Takaichi administration, while promoting a “responsible proactive fiscal policy,” can avoid mere expenditure expansion and instead achieve a genuine strengthening of supply capacity and fiscal reconstruction will be the deciding factor for the future of the Japanese economy.

Reference page

• [Bank of Japan Official Announcement: Materials Related to the Monetary Policy Meeting] https://www.boj.or.jp
• [Cabinet Office: Council on Economic and Fiscal Policy Related Documents] https://www.cao.go.jp

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