BOJ Shouldn’t Delay Normalization Over Risks, LDP Official Says

Erica Yokoyama and Yuki Hagiwara
·2 min read

(Bloomberg) -- The Bank of Japan should stay on course to normalize monetary policy based on developments in the economy without worrying too much about the potential impact of higher interest rates, according to a senior ruling party official.

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“Japan should firmly handle macroeconomic policies and then deal with specific problems as they arise,” Takao Ochi, a Liberal Democratic Party lawmaker in the lower house, said in an interview on Friday. “Otherwise, Japan risks entering a fourth ‘lost decade’.”

While higher interest rates could put a burden on smaller companies seeking financing, the central bank should still keep its policy focused on pursuing stable 2% inflation as part of a virtuous wage-price cycle, he said.

Ochi’s view differs from the opinions of some other ruling party lawmakers. All 10 LDP officials surveyed by Bloomberg in April said the BOJ shouldn’t conduct a second interest rate hike after increasing rates for the first time in 17 years in March.

Read: Some LDP Members Oppose BOJ Rate Hikes Ahead of Political Events

Ochi said authorities won’t know the extent to which this year’s historic price gains fuel demand-led price gains until September. The nation’s largest umbrella group for unions won commitments from large companies to raise wages by more than 5% during this year’s negotiations.

Separately, Ochi suggested that the government should adjust policies based on the currency level of the moment, rather than trying to manipulate it.

While acknowledging the drawbacks of a weaker yen, such as increased import costs, Ochi also highlighted the benefits. He said the weak currency had bolstered exporters’ profits, citing Toyota Motor Co., which reported record-high operating income in the latest fiscal year thanks in part to favorable currency factors.

Ochi also cited a surge in inbound tourism and the return of businesses to the domestic market as positive aspects of the weak yen. “This is a golden opportunity for both Japanese and foreigners to invest in the yen,” said Ochi. He said this a great time to forge policies to highlight Japan’s appeal as an investment destination.

To reverse the currency trend, Ochi said the nation’s fiscal health is important, as well as the Japan-US rate differential and the current account balance. Ochi, also a member of the Headquarters for Promoting the Fiscal Consolidation, expressed concern about the risk of prolonged budget deficits affecting Japan’s credibility. “We will, of course, remain committed to fiscal soundness and ensure confidence in the sustainability of our public finances,” said Ochi.

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