The Cabinet of Prime Minister Sanae Takaichi approved the government’s annual economic and fiscal policy blueprint on Tuesday after tweaking an earlier version to place more emphasis on Bank of Japan independence.

As this is the first time the policy document was drafted under the leadership of Takaichi — who is considered by some analysts to be a fiscal and monetary dove — the market paid close attention to the direction it set.

An early draft released on June 30 stated that the “appropriate management of monetary policy is critically important to achieve a strong economy.” 

As the administration’s approach to monetary policy has been the focus of particular attention, the earlier version shook investor confidence, contributed to a recent bond rout and may have contributed to a further weakening of the yen.

Some investors interpreted the wording as an effort to exert some pressure on the central bank to maintain low rates.

The finalized blueprint, which is formally called the Basic Policy on Economic and Fiscal Management and Reform, said that “the specific methods of monetary policy are left to the Bank of Japan” based on Article 3 of the Bank of Japan Act.

It also added that monetary policy should “contribute to achieving stable inflation,” affirming price stability as the BOJ’s main role. 

In recent weeks, the Takaichi administration has scrambled to ease market concerns. 

Takaichi was forced onto the defensive during last week’s party leader debate. Yuichiro Tamaki, leader of the Democratic Party for the People, questioned the prime minister’s stance on the recent market shock. 

“I do not believe that just a draft of a government document, which has not even been approved by the Cabinet, triggered the market shock,” Takaichi said on July 15. 

“Foreign exchange rates and interest rates are driven by a variety of factors.”

On Tuesday, the yen traded at about ¥162.5 to the dollar in the morning, and 10-year government bond yields climbed to 2.725%.

The blueprint focuses on achieving a “strong economy” and making a fundamental shift toward economic and fiscal management. 

Addressing long-term underinvestment, the Takaichi administration is set to expand investment in crisis management and growth, strengthening key areas such as energy, economic security and science and technology.

The blueprint says that Japan aims for economic growth of over 1% in real terms and over 3% in nominal terms as early as possible, and is also aiming for stable inflation.

If public and private investment successfully grow, Japan’s gross domestic product could reach nearly ¥1.1 quadrillion ($6.78 trillion) by fiscal 2040 compared to ¥670 trillion in fiscal 2025, the blueprint states. 

Under that scenario, the blueprint says the debt-to-GDP ratio, which is above 200% now, is projected to decline steadily, so economic growth and fiscal sustainability can be achieved simultaneously. The Takaichi administration also aims to eliminate the regular use of annual supplementary budgets, which critics argue has contributed to Japan’s high debt.

On the grocery consumption tax cut, the document simply notes that policy direction is to be determined by early August. Negotiations within the National Council on Social Security, which has members from both the ruling and opposition parties, have hit a stalemate.

The government and ruling parties are considering a plan to reduce the rate from 8% to 1% for two years starting April 2027. But some opposition parties remain skeptical that the policy would be effective.