Yen watch: Japan reboots DOGE spending review to fund Takaichi pledges

Tokyo moved on Friday to reboot its spending review, hunting through idle public funds and subsidies to bankroll Sanae Takaichi's expensive policy pledges. The push centres on 201 special-purpose government funds holding an estimated 7 trillion yen — about $44.35 billion — by Tokyo's own figures for the end of next fiscal year.

The renewed push comes after a disappointing first round. That effort reviewed about 120 tax breaks earlier this year and produced just three abolition proposals — a lacklustre outcome that has put pressure on Tokyo to take a harder line now that the hunt turns to idle public money.

The review calls for unused funds to be sent back to state coffers and for stricter cost-benefit checks on subsidy programmes, using outside experts and evidence-based policymaking. Its findings will shape December's tax-reform and budget talks, where the government must show how it funds a food consumption-tax cut planned for April 2027 — alongside defence and industrial spending demands.

Bond investors are the real audience. Japan's benchmark 10-year yield has climbed to multi-decade highs on concern that Takaichi's plans could mean more debt issuance and further strain Japan's finances. A government source told Reuters that Takaichi is betting the DOGE review becomes a real revenue stream, precisely because the funds are large. She has separately pledged to hold new bond issuance to roughly 40 trillion yen, while spending requests for next year climbed to a record 143 trillion yen.

Not everyone is sold. Keiji Kanda, senior economist at Daiwa Institute of Research, warned that funding the food consumption-tax cut out of idle funds and subsidies would move money away from supply-side measures and into demand stimulus — and argued that directing fiscal resources into investment would do more for growth potential while being less inflationary.

Why it matters

This is a fiscal-credibility trade that lands directly in FX. Japan's bond market is forcing the issue: multi-decade highs in 10-year JGB yields tell you investors are pricing the risk of a bigger deficit before the year-end budget talks even conclude. A credible review that caps new issuance near the promised 40 trillion yen would ease some fiscal risk premium out of long-dated JGBs and give the yen a modest tailwind. But markets saw the thin results of round one — three abolitions out of 120 reviews — and will likely wait for hard numbers before rewarding the rhetoric. USD/JPY is holding at 157.85 in the latest market snapshot, essentially where Reuters' report printed it (157.85), which means the headline itself has not moved the pair so far. Finance Minister Satsuki Katayama has meanwhile signalled authorities are watching whether the yen's moves are orderly and reflect fundamentals — language markets read as an intervention warning, as seen in this week's earlier yen pullback on wage data. The fiscal backdrop also frames the Bank of Japan's next move, with the BOJ meeting October 29-30 following September's hike to 1.25%.