By Leika Kihara
TOKYO, Feb 2 (Reuters) – Japanese Prime Minister Sanae Takaichi’s party is likely to score a landslide victory in next week’s lower house election, a survey by the Asahi newspaper showed, heightening the chance the country will continue to pursue big spending and tax cuts.
A strong showing in Sunday’s election would solidify Takaichi’s grip on her party and give a mandate for her expansionary fiscal policy, which could heighten concerns about Japan’s finances and push bond yields higher.
“Implementing expansionary fiscal policy at a time the economy is at near full employment would heighten inflationary pressure” and weaken the yen, said Ryutaro Kono, chief Japan economist at BNP Paribas.
“The Bank of Japan may be forced to accelerate the pace of interest rate hikes to combat the weak yen and inflationary pressures from expansionary fiscal policy,” he said.
Takaichi’s Liberal Democratic Party is likely to well exceed a majority of 233 seats out of 465 seats up for grabs in the lower house, according to Asahi’s poll released on Sunday. That would be an increase from 198 seats now.
Together with LDP’s coalition partner, the Japan Innovation Party or Ishin, the ruling alliance will likely reach 300 seats, the poll showed.
The largest opposition party, the Centrist Reform Alliance, is struggling and could lose half its 167 seats, the Asahi said.
Super-long Japanese government bond yields, which are sensitive to fiscal risks, rose on Monday as investors priced in the chance Takaichi will push through her “proactive” fiscal policy focused on bigger spending and tax cuts.
The yen wobbled after Takaichi’s weekend comments in which she talked up the benefits of a weaker currency were seen as condoning its declines and running counter to efforts by Japanese authorities to prop it up.
“People say the weak yen is bad right now, but for export industries, it’s a major opportunity,” Takaichi said on Saturday, adding that the currency’s decline would boost the value of Japan’s huge foreign reserves.
A government spokesperson said on Monday Takaichi was not highlighting the benefits of a weak yen, and instead stressing the need to create an economic structure resilient to currency fluctuations.
A weak yen has been a source of headache for Japanese policymakers as it pushes up import costs and broader inflation.
FISCAL RISK WORRIES MAY BE OVERBLOWN
Takaichi’s ruling coalition currently holds a slim majority in the powerful lower house but has a minority in the upper house. The premier dissolved parliament last month and called a snap election on February 8 seeking a mandate for her push to reflate the economy with expansionary fiscal policy.
Japan suffered a broad market rout last month after Takaichi pledged to suspend an 8% levy on food sales for two years, reviving investor concerns about fiscal discipline in a country with public debt more than twice the size of its economy.
Most parties have also called for a suspension or a cut to the consumption tax to cushion the blow to households from rising living costs.
Some analysts say a strong LDP win could actually prevent Japan from resorting to extreme tax cuts or spending plans proposed by some opposition parties.
The LDP remains vague on how soon the tax suspension could be put in place, saying only that the timing should be decided in a meeting of ruling and opposition parties.
In its campaign pledge, the LDP clearly commits to reducing Japan’s debt-to-GDP ratio, and pursuing expenditure and revenue reforms, said Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Securities.
“Our view that excessive concern over Japan’s fiscal position is unnecessary remains unchanged,” he said.
(Reporting by Leika Kihara; Editing by Cynthia Osterman, Sonali Paul and Stephen Coates)
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