Government revises language concerning Bank of Japan...
The government is expected to approve the Basic Policy on Economic and Fiscal Management and Reform ("Basic Policy") at a cabinet meeting on July 21. This year’s document strongly reflects Prime Minister Sanae Takaichi’s policy stance, and financial markets reacted sharply by selling off both the yen and JGBs when the draft was released. The market’s response has been dubbed the "Basic Policy shock" and has resulted in an unusual degree of attention being focused on this year’s economic policy blueprint.
The draft included a passage stating that "appropriate monetary policy conduct is also extremely important to achieving a 'strong economy.'" The prevailing view in financial markets was that this was an attempt by the government to discourage further rate hikes by the Bank of Japan. Both the yen and JGBs sold off in response, reflecting concerns that inflation could significantly overshoot if government pressure forced the BOJ to postpone rate hikes—i.e., if the central bank "fell behind the curve." The 10-year JGB yield climbed to 2.9%, its highest level in some 30 years.
In view of these events, the government plans to revise the relevant language in the final version of the Basic Policy to be approved by the Cabinet. It will add a footnote referring to Article 3 of the Bank of Japan Act and stating that "specific monetary policy measures will be entrusted to the Bank of Japan."
The draft included a passage stating that "appropriate monetary policy conduct is also extremely important to achieving a 'strong economy.'" The prevailing view in financial markets was that this was an attempt by the government to discourage further rate hikes by the Bank of Japan. Both the yen and JGBs sold off in response, reflecting concerns that inflation could significantly overshoot if government pressure forced the BOJ to postpone rate hikes—i.e., if the central bank "fell behind the curve." The 10-year JGB yield climbed to 2.9%, its highest level in some 30 years.
In view of these events, the government plans to revise the relevant language in the final version of the Basic Policy to be approved by the Cabinet. It will add a footnote referring to Article 3 of the Bank of Japan Act and stating that "specific monetary policy measures will be entrusted to the Bank of Japan."
But concerns remain over political interference
Article 3, Paragraph 1 of the Bank of Japan Act states that "the Bank of Japan's autonomy regarding currency and monetary control shall be respected." By referring to Article 3, the government seeks to signal to financial markets that it is committed to respecting the central bank's autonomy.
But since the Takaichi administration came to power, its approach to monetary policy has centered on Article 4 of the Act, which stipulates that "recognizing that currency and monetary control is a component of overall economic policy, the Bank of Japan shall always maintain close contact with the government and exchange views sufficiently so that its currency and monetary control is consistent with the government's basic economic policy stance."
Citing Article 4, the administration has argued that the BOJ should not make monetary policy decisions on its own and that the government should determine the direction of policy, as it does with fiscal policy.
While the revision to the wording of the Basic Policy appears to suggest the government has shifted its stance on monetary policy from Article 4 to Article 3, this is probably not the case in practice.
Even after deciding to revise the language, the prime minister and other cabinet members have repeatedly stated that "specific monetary policy measures should be left up to the BOJ." One interpretation of those remarks is that they intend to allow the BOJ to select specific policy measures, such as increases in the policy rate, while not entrusting it with decisions over whether or when to change policy. In other words, the administration does not appear to have altered its previous view that it is the government that should determine the direction of monetary policy.
Even if specific monetary policy measures are left up to the BOJ, changes to the policy rate are now effectively the sole monetary policy instrument, which gives the Bank little discretion.
If the administration genuinely respects the central bank's autonomy and independence, it should simply state that "monetary policy should be entrusted to the Bank of Japan." I do not think that simply revising the wording of the Basic Policy will dispel concerns over political interference by the government.
But since the Takaichi administration came to power, its approach to monetary policy has centered on Article 4 of the Act, which stipulates that "recognizing that currency and monetary control is a component of overall economic policy, the Bank of Japan shall always maintain close contact with the government and exchange views sufficiently so that its currency and monetary control is consistent with the government's basic economic policy stance."
Citing Article 4, the administration has argued that the BOJ should not make monetary policy decisions on its own and that the government should determine the direction of policy, as it does with fiscal policy.
While the revision to the wording of the Basic Policy appears to suggest the government has shifted its stance on monetary policy from Article 4 to Article 3, this is probably not the case in practice.
Even after deciding to revise the language, the prime minister and other cabinet members have repeatedly stated that "specific monetary policy measures should be left up to the BOJ." One interpretation of those remarks is that they intend to allow the BOJ to select specific policy measures, such as increases in the policy rate, while not entrusting it with decisions over whether or when to change policy. In other words, the administration does not appear to have altered its previous view that it is the government that should determine the direction of monetary policy.
Even if specific monetary policy measures are left up to the BOJ, changes to the policy rate are now effectively the sole monetary policy instrument, which gives the Bank little discretion.
If the administration genuinely respects the central bank's autonomy and independence, it should simply state that "monetary policy should be entrusted to the Bank of Japan." I do not think that simply revising the wording of the Basic Policy will dispel concerns over political interference by the government.
Basic Policy omits mention of "fiscal consolidation"
Another aspect of the Basic Policy draft that drew attention was the deletion of the term "fiscal consolidation," which had been used in previous years. This will not be changed in the final version of the document. When asked in the Diet on July 17 why the term had been removed, Prime Minister Takaichi explained that the administration had decided to standardize on the term "fiscal sustainability," which is used by international organizations.
However, I think it is natural to view the deletion of this term, which the government has used for many years, as signaling a retreat in its commitment to fiscal consolidation. The disadvantages to this action are significant, including the potential to encourage sell-offs in the yen and JGBs.
In conjunction with this change, the government's primary fiscal consolidation—or fiscal sustainability—target will also shift from achieving a surplus in the primary fiscal balance to reducing the government debt-to-GDP ratio. Financial markets have interpreted this as signaling a retreat from fiscal consolidation.
It should be noted that the government debt-to-GDP ratio has certain shortcomings as a target, including its status as a lagging indicator of actual fiscal conditions.
However, I think it is natural to view the deletion of this term, which the government has used for many years, as signaling a retreat in its commitment to fiscal consolidation. The disadvantages to this action are significant, including the potential to encourage sell-offs in the yen and JGBs.
In conjunction with this change, the government's primary fiscal consolidation—or fiscal sustainability—target will also shift from achieving a surplus in the primary fiscal balance to reducing the government debt-to-GDP ratio. Financial markets have interpreted this as signaling a retreat from fiscal consolidation.
It should be noted that the government debt-to-GDP ratio has certain shortcomings as a target, including its status as a lagging indicator of actual fiscal conditions.
Decision on consumption tax cut for food items to be made by early August
The government plans to state explicitly in the final version of the Basic Policy that it will make a decision on a consumption tax cut for food items "by early August." In parallel, an interim report has been completed on a new income-linked benefit scheme that has been discussed by the bipartisan National Council on Social Security, although significant differences of opinion remain across party lines over lowering the tax rate, with no agreement currently in sight.
The problem with both a consumption tax cut for food products and the new benefit scheme is that their implementation is being discussed without consideration for how they will be funded. I suspect this has amplified financial market concerns over fiscal deterioration and exacerbated recent sell-offs in the yen and JGBs.
Cosmetic changes such as revisions to the wording of the Basic Policy will not dispel market concerns over the government's expansionary fiscal policy or the potential for political interference in the Bank of Japan.
The government must take the recent declines in the yen and Japanese bonds—which could seriously undermine economic and financial market stability—as a genuine warning from the market and substantially revise its policy stance to restore the confidence of market participants.
Reference materials:
"Basic Policy to state explicitly that specific monetary policy measures will be 'left to BOJ,' with plans to cut consumption tax on food items 'by early August,'" July 18, 2026, Nikkei.
"Basic Policy deletes mention of 'fiscal consolidation' and will standardize on 'fiscal sustainability,' says Prime Minister Takaichi," July 17, 2026, Reuters.
"Basic Policy to state explicitly that consumption tax cut for food items will be decided 'by early August,'" July 17, 2026, Asahi Shimbun.
The problem with both a consumption tax cut for food products and the new benefit scheme is that their implementation is being discussed without consideration for how they will be funded. I suspect this has amplified financial market concerns over fiscal deterioration and exacerbated recent sell-offs in the yen and JGBs.
Cosmetic changes such as revisions to the wording of the Basic Policy will not dispel market concerns over the government's expansionary fiscal policy or the potential for political interference in the Bank of Japan.
The government must take the recent declines in the yen and Japanese bonds—which could seriously undermine economic and financial market stability—as a genuine warning from the market and substantially revise its policy stance to restore the confidence of market participants.
Reference materials:
"Basic Policy to state explicitly that specific monetary policy measures will be 'left to BOJ,' with plans to cut consumption tax on food items 'by early August,'" July 18, 2026, Nikkei.
"Basic Policy deletes mention of 'fiscal consolidation' and will standardize on 'fiscal sustainability,' says Prime Minister Takaichi," July 17, 2026, Reuters.
"Basic Policy to state explicitly that consumption tax cut for food items will be decided 'by early August,'" July 17, 2026, Asahi Shimbun.
Profile
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Takahide KiuchiPortraits of Takahide Kiuchi
Executive Economist
Takahide Kiuchi started his career as an economist in 1987, as he joined Nomura Research Institute. His first assignment was research and forecast of Japanese economy. In 1990, he joined Nomura Research Institute Deutschland as an economist of German and European economy. In 1996, he started covering US economy in New York Office. He transferred to Nomura Securities in 2004, and four years later, he was assigned to Head of Economic Research Department and Chief Economist in 2007. He was in charge of Japanese Economy in Global Research Team. In 2012, He was nominated by Cabinet and approved by Diet as Member of the Policy Board, the committee of the highest decision making in Bank of Japan. He implemented decisions on the Bank’s important policies and operations including monetary policy for five years.
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