Japan's Basic Policy on Economic and Fiscal Management and Reform 2026 adopted Tuesday by the Cabinet was a response to the so-called basic policy shock, the selloff of bonds and yen triggered by the draft basic policy that was announced last month.

The government aimed to calm the market with the Tuesday adoption, but concerns about "responsible and proactive public finances" continue to smolder.

Soon after the government released the draft basic policy on June 30, government bonds were sold off, causing long-term interest rates to surge, and the yen weakened. Market participants were concerned about a passage newly included in the draft stating that "it is extremely important that monetary policy be conducted appropriately."

A view spread that the government, which prioritizes economic growth, was attempting to rein in the Bank of Japan as it moves to raise interest rates to curb inflation. If interest rates do not rise and inflation persists, the values of government bonds and the currency are expected to decline, accelerating selling pressure.

Some observers have said the removal of the phrase "fiscal consolidation" -- which was included up through the previous year -- and its replacement with "fiscal sustainability" also led to a reluctance to buy government bonds. If fiscal conditions deteriorate, confidence in the government's ability to repay its debt will erode, discouraging people from buying government bonds, which lowers prices and raises interest rates.

Highest level in 30 years

Initially, the government was optimistic, viewing the market reaction as temporary and asserting that the draft policy was not a cause of turmoil. At a press conference on July 7, minister in charge of Japan's growth strategy Minoru Kiuchi said: "It's a misinterpretation that is different from the intent of the draft. We have no plans to make changes."

A senior Cabinet Office official also said: "Rising interest rates are a global trend. This is not a shock."

However, the rise in long-term interest rates continued unabated, and on July 9, the yield on 10-year government bonds -- a key benchmark in the domestic bond market -- temporarily reached 2.9%, the highest level in about 30 years. As calls grew from the ruling party and the Finance Ministry to strike a balance, the Cabinet Office and the Finance Ministry reached a compromise by including a footnote referencing Article 3 of the Bank of Japan Law, which stipulates the Bank of Japan's independence.

Challenges pile up

Still, market concerns have not been completely dispelled.

Prime Minister Sanae Takaichi's administration has incorporated the vigorous promotion of public-private investment into the basic policy as a measure to achieve economic growth through "responsible and proactive public finances." The policy stipulates the establishment of a "stronger and more prosperous Japan" investment category and decided not to set a budget request ceiling for it.

However, the source of funding for this category has not yet been clarified. The government plans to cover the costs through measures such as the issuance of bridge bonds, backed by projected future revenue, but securing funds this way is expected to be difficult.

Furthermore, there are numerous other factors that would increase government spending besides public-private investment, such as higher defense spending and a consumption tax cut on food items.

----

This article is from The Yomiuri Shimbun. Neither Dow Jones Newswires, MarketWatch, Barron's nor The Wall Street Journal were involved in the creation of this content.

YDN-M0000219090-1

(END) Dow Jones Newswires

July 22, 2026 08:34 ET (12:34 GMT)

Copyright (c) 2026 The Yomiuri Shimbun