(Bloomberg) -- Katsunobu Kato is set to become Japan’s next finance minister, according to Kyodo News, replacing Shunichi Suzuki to take on the job of steering the country’s finances through a period of economic change.
Kato, who contested in the ruling Liberal Democratic Party’s leadership election on Friday, helped guide Japan through the Covid-19 pandemic, when the country fared better than most of its Group of Seven peers. The 68-year-old has played key roles in recent administrations and was a finance ministry official before going into politics.
The former health minister will be taking on one of the highest-profile positions in Cabinet, overseeing a range of policies from currency to budgets. Among the challenges he’ll face is Japan’s perennial problem of the largest debt load among advanced economies. The debt problem is set to become more complicated as the Bank of Japan slowly moves toward more interest rate hikes, which would keep increasing debt-servicing payments.
Shigeru Ishiba, who is set to become the new prime minister, has said he supports the BOJ’s independence and normalization path in principle, and that the country needs to defeat deflation.
In a Bloomberg interview last month, Kato said Japan should continue to aim for interest rates and prices to “keep moving.” He said years of stagnant prices and rates “created structural distortions.” Kato had\s advocated for a balanced approach to managing fiscal health and seeking growth.
Since the stand-pat decision at the latest policy meeting, BOJ Governor Kazuo Ueda has signaled the bank has some room to consider its next steps after the yen gained against the dollar. Still, he hasn’t ruled out the possibility of additional rate hikes, depending on data.
Kato’s predecessor Suzuki repeatedly said the government should watch the impact from rising yields on debt-servicing costs, warning that higher yields could weigh on finances. Japan’s debt reached 255% of its gross domestic product in 2024, according to the International Monetary Fund.
Kato will likely be tasked with putting together measures to soften the impact of inflation on households. Ishiba said he needs to consider what measures would be effective in his post-victory presser Friday.
Toward the end of the year, the ministry is also expected to finalize the initial budget for the year starting from April. Japan’s various ministries have requested a record ¥117.6 trillion ($827 billion) budget in total, partly driven by increased defense spending and rising social security costs.
Read: Japan’s Ministries Ask for Record $811 Billion Budget
Although Japan’s fundamental problems remain, higher-than-expected tax revenues and efforts to cut spending have recently improved its short-term fiscal outlook. The government now expects to finally hit its long-held primary balance surplus goal next fiscal year but it remains to be seen if the trend can be maintained.
Outgoing minister Suzuki served his role for three years, succeeding his brother-in-law Taro Aso. He began his term in 2021 amid the pandemic and navigated challenges including currency interventions, the war in Ukraine, financial instability from the collapse of US banks, and the need to secure funding for increased defense and childcare spending.
The historic depreciation of the yen particularly created tensions domestically, as the yen hit 160 against the dollar for the first time in 38 years earlier in 2024. That weighed on households and businesses through higher import costs, and the sharp moves ended up requiring authorities to step into the market multiple times to prop up the yen. The currency has significantly strengthened since then, after the yield differential between Japan and the US narrowed.
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