By Leika Kihara
TOKYO, Dec 17 (Reuters) - Japan must pursue proactive spending, rather than excessive fiscal tightening, that will boost growth and tax revenues, Prime Minister Sanae Takaichi said on Wednesday, reiterating her administration's focus on reflating a fragile economy.
"When I say proactive fiscal policy, I am talking about strategic deployment of fiscal stimulus," Takaichi said. "This doesn't mean we will resort to reckless expansion of spending," she said in a statement read out at a panel
on economic policy hosted by business lobby Keidanren.
The remarks come as the benchmark 10-year Japanese government bond yield hit an 18-year high on Wednesday, on concerns the Takaichi administration's big spending plans could worsen Japan's already dire finances.
Takaichi delivered the statement at the panel consisting of her reflationist advisers including former Bank of Japan Deputy Governor Masazumi Wakatabe, who is currently a member of the government's top economic council.
Wakatabe dismissed the view, voiced by some analysts, that investors may lose trust in Japan's fiscal management and ignite a triple selling of stocks, yen and government bonds.
"While policymakers must be vigilant to excess market volatility, we're not seeing any moves deviating from fundamentals," he told the panel.
Wakatabe also said the government must raise Japan's neutral rate of interest - or the level that neither stimulates nor cools growth - by boosting the economy's potential growth through fiscal spending and a growth strategy.
"If Japan's neutral rate rises as a result, it would be natural for the BOJ to raise interest rates," Wakatabe said.
"The BOJ, however, must avoid raising rates prematurely or withdrawing monetary support too much," he added.
The BOJ is set to raise interest rates at a two-day policy meeting ending on Friday, closing 2025 with two rate hikes, despite headwinds from U.S. tariffs and the inauguration of a dovish prime minister.
(Reporting by Leika Kihara; Editing by Jacqueline Wong and Alexander Smith)
