"150 yen per dollar"... Weak yen outlook as Japan's Takaichi is elected

Takaichi: "Responsible proactive fiscal policy"

It's a factor for rising stock prices but a burden on public finances

Possibility of rising government bond yields

Suggests intervention in Bank of Japan policy

Makes it difficult to raise the policy rate this month

Possibility of a significant drop in the value of the yen

Sanae Takaichi, who will become Japan's first female prime minister, faces a mountain of economic challenges as the new Liberal Democratic Party president. Her "responsible proactive fiscal policy" is a factor that could push up stock prices, but it also raises concerns about fiscal deterioration and could lead to higher government bond yields. With the election of Takaichi, a "monetary easing advocate," there are forecasts that additional policy rate increases by the Bank of Japan will be delayed and yen weakness will accelerate.

According to Mainichi Shimbun on the 5th, Takaichi has long advocated "proactive fiscal policy." The focus is measures to boost inflation. At a press conference after her election as president on the 4th, she showed determination, saying, "I want to devote efforts to measures to boost inflation no matter what happens." She is expected to pursue abolishing the provisional rate added to the gasoline tax.

There is also the possibility of progress in consultations with opposition parties. The "benefit-type tax credit" that Takaichi raised during this election as a price measure was originally a policy advocated by the largest opposition party, the Constitutional Democratic Party. It is a method that combines an income tax cut with cash payments. Takaichi said she "agrees" with the third party, the Democratic Party for the People, which proposed raising the annual tax-exempt income threshold to 1.78 million yen.

Takaichi refrained from commenting on the consumption tax cut demanded by the opposition. This is because former Prime Minister Taro Aso, who had backed her in the presidential election, showed a cautious stance on consumption tax cuts. Aso is a former finance minister. However, at a press conference the previous day, Takaichi said, "It is by no means abandoned as an option."

These policies would reduce government tax revenue and increase the fiscal burden, so securing funding is a major task. Takaichi plans to use the increased tax revenue and, if insufficient, to issue deficit-covering government bonds. However, a senior Ministry of Finance official expressed caution, asking, "(To what extent does Takaichi) understand the current fiscal difficulties?"

It is not only the government that is wary of Takaichi. In last year's LDP presidential election, she targeted the Bank of Japan, saying, "I think raising the (policy) rate now would be a stupid thing." She restrained the Bank of Japan, which seeks to raise the policy rate to normalize monetary policy. Takaichi also hinted at the possibility of intervening in monetary policy at a press conference the previous day.

The Bank of Japan is considering the timing of an additional policy rate hike. The market had been viewing a rate increase this month as the most likely. However, with Takaichi's election, there is a view that a rate increase in October has become less likely. If the policy rate is kept unchanged, there is concern that yen weakness will accelerate, but if it is raised, it could strengthen the yen and thereby reduce exporters' profitability, posing a downside risk to the economy.

The market expects a sharp weakening of the yen early next week. Previously, the market had expected the election of Shinjiro Koizumi, who advocated "monetary normalization" and "fiscal consolidation," but since that prediction missed the mark, the foreign exchange market is expected to swing sharply. There is also a view that the yen–dollar exchange rate could rise from the current around 147 yen per dollar to the 150 yen range. This means the value of the yen would fall.

Tokyo=Kim Il-gyu, correspondent

Kim Il-gyu, reporter black0419@hankyung.com