Will the yen's weakness stop…Interest in Finance Minister Katayama's commitment to a 'strong yen'

"Expectations that, as a former Finance Ministry official, she will find fiscal expansion measures without yen depreciation"

"The Takaichi cabinet will find it difficult to allow further yen declines to maintain approval ratings"

With Satsuki Katayama, who holds the view of a 'strong yen', being appointed as Japan's next finance minister, there are prospects that the yen's weakness will ease.

On the 21st, just after Japanese media reported that Prime Minister Takaichi was likely to appoint Satsuki Katayama as finance minister, the yen reached 150.50 per dollar.

The 66-year-old member of the House of Councillors and former Finance Ministry official Katayama said in an interview with Reuters last March, "Considering the fundamentals of the Japanese economy, the real value of the yen is closer to 120–130 per dollar."

This remark came when the yen was trading around 150 per dollar amid market expectations that the Bank of Japan would ease monetary tightening.

Akira Moroga, chief market strategist at Aozora Bank, said, "Considering Katayama's past remarks, she appears to prefer reversing yen weakness." This view is also close to the U.S. government's position, which favors a stronger yen.

Prime Minister Takaichi models herself on former British Prime Minister Margaret Thatcher and is known to succeed Abenomics. In other words, she is a supporter of expansionary fiscal and monetary policies. Therefore, when she was elected leader of the Liberal Democratic Party, markets expected her to implement large-scale fiscal spending and oppose Bank of Japan rate hikes, which led to declines in the yen and bond prices.

However, the Takaichi administration also faces the challenge of raising the Liberal Democratic Party's lowered approval ratings.

Japan's weak yen has driven up import prices, causing inflation and higher living costs, which adversely affected the Liberal Democratic Party's approval ratings. Thus, Takaichi's task is to pursue fiscal expansion without causing further yen depreciation.

The appointment of Katayama as finance minister by Prime Minister Takaichi suggests the possibility of adopting Katayama's views on fiscal and monetary policy.

Katayama, a former Finance Ministry official well versed in fiscal matters, is known to be close to former and current Finance Ministry executives who oversee exchange-rate policy. She is known for making direct and strong decisions, in contrast to the low-profile incumbent finance minister Katsunobu Kato.

Katayama is well acquainted with the Finance Ministry's budget drafting process. Analysts expect Katayama could help find ways to fund Takaichi's bold spending plans.

Hiroyuki Machida, ANZ's head of FX and commodities sales for Japan, said, "Katayama may find ways for Takaichi to expand fiscal spending," predicting, "Katayama's appointment as finance minister will accelerate the Takaichi trade."

Katayama's stance on Bank of Japan rate hikes is unknown.

Japan's economic conditions now are completely different from when former Prime Minister Shinzo Abe implemented the fiscal and monetary stimulus of 'Abenomics' amid deflation 10 years ago.

Since last year, inflation has exceeded the 2% target, prompting the Bank of Japan to halt a decade-long easing policy last year and subsequently raise rates twice. This was done amid political pressure to curb the weak yen that was raising living costs.

Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, pointed out, "Japan's current problem is inflation and a weak yen, not deflation and a strong yen," and added that "the U.S. government is also pressuring the Bank of Japan (BOJ) to raise rates."

He predicted that "it will be difficult for the Takaichi administration to pressure the Bank of Japan to delay rate hikes," forecasting a possibility that the BOJ will raise rates in December.

Markets are paying attention to Katayama's views on whether the Bank of Japan will raise rates. Rate hikes would increase the government's debt servicing costs but could help curb a rapid depreciation of the yen.

Eiji Duke, chief bond strategist at SBI Securities, said, "Katayama is well versed in finance ministry work," adding, "she is likely to be neutral on fiscal and monetary policy."

Correspondent Jeong-ah Kim kja@hankyung.com