In a decisive statement amidst Japan’s ongoing leadership race, Sanae Takaichi, the country’s economic security minister and a frontrunner in the Liberal Democratic Party (LDP) contest, has advocated for the Bank of Japan (BOJ) to maintain ultra-low interest rates. Her argument rests on the need to bolster the fragile economic recovery. Takaichi, who has emerged as a strong contender for the LDP’s leadership, asserted during a press conference on Saturday that the BOJ’s recent interest rate hikes were “too early,” adding that rates should be kept low. Her stance aligns with her previous comments on her personal YouTube channel where she emphasized the importance of sustained fiscal and monetary support for the economy.
Takaichi’s stance contrasts with the recent actions of the BOJ. In March, the central bank abandoned its negative interest rate policy and raised short-term rates to 0.25% in July. This decision was driven by the belief that the economy was making progress toward achieving its 2% inflation target. However, BOJ Governor Kazuo Ueda has signaled the bank’s readiness to increase rates further if inflation remains around 2% in the coming years, particularly if accompanied by robust wage gains.
The LDP’s new leader will be selected on September 27th, with the victor assuming the role of Prime Minister due to the party’s majority in Parliament. Incumbent Prime Minister Fumio Kishida announced last month that he would step down as LDP chief in September, marking the end of his three-year term as leader of the world’s fourth-largest economy.
A majority of economists polled by Reuters anticipate that the BOJ will raise rates again this year, with over three-quarters of them predicting a December hike. None in the poll anticipated a rate increase next week.
While most of the LDP candidates have voiced support for a spending package aimed at mitigating the impact of rising living costs, they have not provided details on how to fund this additional expense. Taro Kono, the minister in charge of digitalization, has emerged as an outlier, arguing that increased spending or generous subsidies may not necessarily stimulate economic growth. He stressed the need for a comprehensive debate on improving Japan’s fiscal health, acknowledging the rising cost of funding its substantial public debt in the face of rising interest rates.
Toshimitsu Motegi, another candidate and prominent ruling party official, has suggested that the government could finance various spending initiatives by tapping into the massive reserves set aside for currency intervention. While most of these reserves are currently invested in U.S. government bonds, Motegi proposes considering alternative investments to generate better returns.
The upcoming leadership election and the BOJ’s monetary policy decisions will have significant implications for Japan’s economic future. The balance between supporting economic growth and managing fiscal health will be a key challenge for the new leader, and the BOJ’s approach to interest rate adjustments will directly influence the country’s economic trajectory.
