The new Japanese ruling coalition is planning a large-scale expenditure, but "Abenomics 2.0" is expected to be shelved.

The new members of the ruling coalition in Japan are expected to give the green light to Prime Minister Kanetsugu Sanae's large-scale fiscal spending plan, but they will not support a restart of "Abenomics" style fiscal and monetary policies. This week, Kanetsugu Sanae officially became the Prime Minister of Japan. The coalition government formed by her Liberal Democratic Party and the Japan Innovation Party has entered into a new cooperation. This collaboration marks the first time the Japan Innovation Party, which advocates tax cuts, wealth distribution, and focuses on reducing bureaucracy and wasteful spending, has entered the Japanese government. The Japan Innovation Party is known to prefer the concept of a "small government," which differs from the calls of some opposition parties to increase fiscal subsidies and reduce taxes. This may help balance Kanetsugu Sanae's policy orientation towards "large-scale spending." Takahide Kiuchi, an economist at Nomura Research Institute, stated, "The Japan Innovation Party advocates for a small and efficient government, while Kanetsugu Sanae has always supported expansionary fiscal and monetary policies. Cooperation with the Japan Innovation Party may restrain Kanetsugu Sanae's policy inclination and promote a more balanced economic policy." According to government sources in Japan, Kanetsugu Sanae is expected to unveil a spending plan exceeding the 13.9 trillion yen scheme set by former Prime Minister Iwao Shimo last year. This plan will include measures agreed upon by both parties, such as gasoline tax reductions, subsidies to curb utility cost increases, and tax cuts for families. However, the Japan Innovation Party has given up its proposal to temporarily freeze the consumption tax on food, as it was warned by the ruling party that such a policy could place significant pressure on Japan's long-term fiscal sustainability. Fumitake Fujita, co-leader of the Japan Innovation Party, stated that although both parties acknowledge the necessity of expansionary fiscal policies to support economic growth, Kanetsugu Sanae also agrees to promote expenditure reform. Fujita stated in an interview on October 16, "Neither I nor Kanetsugu Sanae believe Japan can resort to reckless fiscal spending." Abe's Legacy "Abenomics," promoted by former Prime Minister Shinzo Abe, combined large-scale fiscal spending and bold monetary easing to help Japan overcome long-term deflation, partly caused by the unfavorable impact of the yen's appreciation on exports. Kanetsugu Sanae has long been seen as a supporter of "Abenomics." This has raised expectations in the market that Kanetsugu Sanae may introduce "Abenomics 2.0" to revive the still sluggish economic growth. However, analysts point out that the main issue Japan faces is no longer insufficient demand, as inflation is currently high and the depreciation of the yen is increasing import costs. Therefore, any expenditure scheme will not directly target stimulating consumption. Another force that may counterbalance Kanetsugu Sanae's expansionary policies comes from senior Liberal Democratic Party member and former Prime Minister and Finance Minister Taro Aso. He has been appointed as the Vice President of the Liberal Democratic Party and has been advocating for fiscal discipline at Japan's high debt levels. Some officials within the Japanese government welcome such moderation. A Japanese government official stated, "It would be positive if the Japan Innovation Party could influence Kanetsugu Sanae from a fiscal discipline perspective." Differences in Monetary Policy Unlike ten years ago with "Abenomics," the key difference in current policies may lie in monetary policy. The Bank of Japan has begun gradually raising ultra-low interest rates. Although Kanetsugu Sanae has previously called the idea of the Bank of Japan raising rates "stupid," she recently only expressed her hope that the bank pursues "modest inflation" supported by wage growth. Former Deputy Governor of the Bank of Japan, Masazumi Wakatabe, reportedly one of Kanetsugu Sanae's policy advisors, stated that although the Bank of Japan may find it difficult to raise rates this year, if the sustainable outlook for inflation improves, the bank may move towards a rate hike. The Japan Innovation Party also calls for the gradual normalization of the Bank of Japan's "unconventional" stimulus policies once the economy stabilizes. Hirofumi Yoshimura, co-leader of the Japan Innovation Party, stated in an interview in July that the Bank of Japan should gradually and cautiously exit the ultra-loose policy. Analysts believe that as the rising cost of living becomes a political focus, both parties are unlikely to oppose a moderate pace of rate hikes, especially when further depreciation of the yen could worsen inflationary pressures. Osamu Takashima, Chief FX Strategist at Citi Tokyo Branch, pointed out, "If Kanetsugu Sanae pressures the Bank of Japan, the yen will depreciate further, and inflation will rise faster. She may lose support from the Japanese people - this could be a very, very dangerous game for her."