Japan's next finance minister could unsettle yen bears

By Leika Kihara and Makiko Yamazaki TOKYO (Reuters) -The expected appointment of Satsuki Katayama as Japan's next finance minister could give markets cause to rethink pushing the yen too low, but might also help the country's new leader find fresh ways to fund bold economic stimulus plans. Japan's new prime minister Sanae Takaichi is likely to appoint Katayama as finance minister, local media reported on Tuesday, which would make her the first woman to hold the role. The report briefly pushed the dollar down to around 150.50 yen, before it recouped losses to climb above 151 yen. In an interview with Reuters in March, Katayama, a 66-year-old veteran upper house lawmaker and former finance minister bureaucrat, said Japan's economic fundamentals suggest the yen's real value is closer to 120-130 per dollar. Those comments were made when the yen had fallen to around 150 against the dollar on market expectations that the Bank of Japan would go slow on monetary tightening. The yen is currently trading around 151 per dollar. "Given her past remarks, it seems Katayama favours reversing a weak yen. Markets may have seen that as similar to the views of U.S. Treasury Secretary Scott Bessent," said Akira Moroga, chief market strategist at Aozora Bank. Katayama declined to comment on Tuesday. Takaichi was voted in as Japan's first female prime minister on Tuesday, marking a symbolic shattering of the glass ceiling in a country where men still wield most power. The yen and bond yields fell after the vote on market expectations that Takaichi, known as a proponent of expansionary fiscal and monetary policy, would deliver big spending and push back against an early BOJ rate hike. OUTSPOKEN, DECISIVE, INSIDER A former finance ministry bureaucrat well-versed in fiscal affairs, Katayama has a knack for currency diplomacy, and befriends former and incumbent executives at the ministry overseeing exchange-rate policy. She is known for being outspoken and punchy decision-making, which contrasts with incumbent finance minister Katsunobu Kato, who rarely goes off script and keeps a low profile. In the March interview, Katayama had said U.S. President Donald Trump's administration did not want excessive yen weakness versus the dollar. Indeed, Bessent said last week the yen would find its own level if the central bank follows "proper monetary policy" in his latest swipe at the slow pace of BOJ rate hikes. The appointment of Katayama would come at a time of rising living costs, blamed in part on higher import prices caused by a weak yen. Those factors have hurt households and the ruling party's approval ratings. As a former bureaucrat, Katayama knows well the inner workings of the finance ministry's budget drafting. While her background at the finance ministry could prod her to call for fiscal discipline, some analysts say she could use her expertise to help Takaichi find ways to fund her bold spending plans. "She'll know how to find sources of revenue if Takaichi wants to expand fiscal spending," said Hiroyuki Machida, director of Japan FX and commodities sales at ANZ. "Personally, I think this appointment will accelerate 'Takaichi-trade'." The challenge for Takaichi would be to pursue fiscal expansion without causing an unwelcome slide in the yen. Katayama will head the ministry that will be the government's main window of communication with the central bank, though little is known about Katayama's stance on BOJ rate hikes. Economic and political reality could prevail as Japan faces challenges different from a decade ago, when former premier Shinzo Abe deployed the "Abenomics" mix of fiscal and monetary stimulus that Takaichi still praises. With inflation exceeding its 2% target, the BOJ's exit last year from a decade-long stimulus and its two rate hikes since then came amid political pressure to combat yen falls that were pushing up the cost of living. "Japan's current problem is not deflation and a strong yen, but inflation and a weak yen. There's also pressure from Washington for the BOJ to raise interest rates," said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute. "It would be hard for Takaichi's administration to exert strong pressure on the BOJ to delay rate hikes," he said, predicting the chance of a rate increase in December. Markets will be focused on Katayama's views on whether the BOJ should proceed with raising still-low interest rates, which could increase Japan's debt-servicing costs but help keep sharp yen falls in check. "Katayama is a former finance minister bureaucrat and so well informed on the ministry's affairs," said Eiji Douke, chief fixed income strategist of SBI Securities. "She's likely neutral on fiscal and monetary policy." (Reporting by Leika Kihara and Makiko Yamazaki; Additional reporting by Yoshifumi Takemoto and Takahiko Wada; Editing by Sam Holmes)

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