Investing.com — Japan’s planned shift towards investment-led growth could increase volatility in the yen as policymakers balance industrial spending, heavy government debt and rising borrowing costs, Deutsche Bank analysts said.
Prime Minister Sanae Takaichi’s “Strong and Rich Japan” blueprint seeks to reverse decades of underinvestment through 370 trillion yen in public-private projects.
Seventeen strategic industries have been identified, including artificial intelligence, quantum computing, defence, aviation, shipbuilding and critical minerals.
Financing those ambitions presents a challenge, with Japan’s government debt exceeding 200% of gross domestic product. The new fiscal framework shifts attention away from annual primary-balance targets towards a sustained reduction in the debt-to-GDP ratio.
That approach relies on keeping nominal economic growth above the government’s average funding cost. Japan is targeting 3% nominal GDP growth through 2040, combining 2% inflation with 1% real growth.
Higher interest rates could quickly narrow the available fiscal space. Each 100-basis-point rate increase could add about 5 trillion yen, or 0.7% of GDP, to consolidated financing costs.
Policymakers may respond by directing more domestic savings towards government bonds and strategic investments.
Japanese households hold about half of their $15 trillion in savings as cash and deposits. Adding government bonds to tax-exempt investment accounts or expanding retail bond programmes could channel some of that money into domestic markets.
The Government Pension Investment Fund also holds half of its $1.8 trillion portfolio overseas. Moving to the upper end of its permitted domestic allocation ranges could bring roughly $200 billion back into Japanese stocks and bonds.
A larger policy change that doubled the domestic bond allocation to 50% could theoretically generate more than $400 billion in inflows.
Such repatriation would support the yen. Renewed Bank of Japan bond purchases or prolonged monetary accommodation aimed at controlling yields would probably weaken it.
USD/JPY has remained near 160 despite the Iran war and changing Federal Reserve expectations.
One-year currency volatility remains near multi-year lows, leaving markets vulnerable to larger moves as Japan shifts its policy focus from stabilising the yen towards managing government yields.
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