Takaichi Keeps Key Ministers in First Cabinet Reshuffle

Japanese Prime Minister Sanae Takaichi carried out her first cabinet reshuffle on Thursday, retaining key ministers in a move that signals policy continuity as she seeks political backing for her spending agenda amid unsettled financial markets.

Finance Minister Satsuki Katayama kept her post, providing continuity in Japan's exchange-rate policy. Katayama, a former finance ministry official seen as conservative on fiscal matters, played a central role in negotiations with US Treasury Secretary Scott Bessent over a rare joint US-Japan yen intervention in late July. Her reappointment is likely to be welcomed by bond markets wary of Takaichi's plans to increase government spending, which could lead to higher debt issuance, analysts say.

In a sign that the prime minister does not intend to scale back her spending plans, she also retained her reflationist ally Minoru Kiuchi as economy minister. The yield on the benchmark 10-year Japanese government bond reached three-decade highs this week. Japan's public debt, at twice the size of its economy, is the largest among advanced nations.

Other key ministers kept their positions, including Foreign Minister Toshimitsu Motegi and Defence Minister Shinjiro Koizumi, both of whom contested last year's ruling party leadership race. To strengthen cooperation with the Liberal Democratic Party's coalition partner, Takaichi appointed Hiroshi Nakatsuka of the Japan Innovation Party as minister in charge of deregulation.

Chief Cabinet Secretary Minoru Kihara, who also retained his post, announced the new lineup. Takaichi is scheduled to hold a news conference on Thursday evening.

Parliamentary debate over the prime minister's economic policies is set to begin soon, presenting a difficult balancing act. With households strained by rising living costs, backing down on pledges to cut taxes and boost spending risks hurting her approval ratings. However, her plan for a two-year tax cut on food items triggered a bond sell-off and criticism from Bessent, increasing pressure on her to heed market calls for fiscal discipline.

Takaichi's pledge to cap new government bond issuance at around 40 trillion yen ($256 billion) for the fiscal 2027 budget is already under scrutiny after budget requests rose to pandemic-era levels. Japan also faces the prospect of higher defence spending in a strategy review this year. The cost of funding the country's debt is climbing as the central bank raises interest rates and slows bond purchases to wean the economy off decades of massive stimulus. The Bank of Japan is widely expected to raise its main policy rate by 25 basis points to 1.25% on Friday.