2024-10-28 06:35:00
By Makiko Yamazaki
TOKYO (Reuters) – The loss of Japan‘s ruling bloc’s parliamentary majority has heightened prospects that a new government will need to ramp up spending and of potential complications for further central bank interest rates hikes.
Prime Minister Shigeru Ishiba’s ruling Liberal Democratic Party (LDP) and its longtime partner Komeito failed to retain a majority in lower house elections on the weekend, casting doubts over how long the 67-year-old premier can keep his job.
“Regardless of who will be in power, the new government will be forced to take expansionary fiscal and monetary policies to avoid inflicting burdens on voters,” said Saisuke Sakai, senior economist at Mizuho Research and Technologies.
To stay firmly in power, the LDP, which has governed Japan for almost all its post-war history, will likely need to court smaller opposition parties, such as the Democratic Party for the People (DPP) and Japan Innovation Party (JIP), as coalition partners or at least for policy-based alliances.
Both smaller parties have ruled out forming a coalition with the LDP but said they are open to some policy cooperation.
In their election campaigns, both the DPP and JIP pledged to lower consumption tax from 10%. DPP’s proposals also included cutting power utility bills and tax for lower-income earners.
While Ishiba has already proposed a supplementary budget that exceeds last year’s 13 trillion yen ($85 billion), he could face pressure for a package that exceeds 20 trillion yen, Sakai said.
‘POLITICAL NOISE’
The heightened political turmoil could make it harder for the Bank of Japan in its bid to wean the economy off decades of monetary stimulus, analysts say.
The central bank ended negative interest rates in March and raised short-term rates to 0.25% in July on the view Japan was making progress towards durably achieving its 2% inflation target.
BOJ Governor Kazuo Ueda has vowed to continue lifting rates and economists don’t see any major immediate change to the broader policy direction.
However, a markedly new parliamentary makeup could deprive the BOJ of the political stability it needs to steer a smooth lift-off from near-zero interest rates, analysts say.
“The bar is higher for the BOJ to raise interest rates again by the end of this year amid this political noise,” said Masahiko Loo, senior fixed income strategist at State Street (NYSE:) Global Advisors.
DPP leader Yuichiro Tamaki has criticised the BOJ for raising rates prematurely.
JIP proposes legislative changes that would mandate the central bank with objectives beyond just price stability, such as sustained nominal economic growth rate and maximization of employment.
Conversely, the biggest opposition, Constitutional Democratic Party of Japan, has called for BOJ’s inflation target to be lowered to one “exceeding zero” from 2% currently, which would reduce the threshold for more rate hikes.
At the same time, a weak yen could become a headache for Japanese policymakers by boosting the cost of imported raw materials, pushing up inflation and hurting consumption.
If the yen weakens toward 160 per dollar, the BOJ “would be pressured to raise rates again to stem the weakness of the Japanese currency,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
The need for another rate hike could also grow if a yen downturn is accelerated by a Donald Trump victory in the U.S. presidential election on Nov. 5, he added.
Trump’s tariff and stricter immigration policies are seen as inflationary, which would diminish the need for U.S. rate cuts, in turn pushing the dollar up against the yen.
“The visibility has gone down significantly for the BOJ,” Minami said.
($1 = 153.5700 yen)
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**Interview with Saisuke Sakai, Senior Economist at Mizuho Research and Technologies**
**Interviewer:** Good morning, Saisuke. There are heightened concerns regarding Japan’s monetary policy following the recent parliamentary elections that saw the ruling coalition lose its majority. What impact do you foresee this having on the Bank of Japan’s ability to raise interest rates?
**Saisuke Sakai:** Good morning! The situation post-election definitely complicates things for the Bank of Japan (BOJ). With the loss of a parliamentary majority, there’s increased pressure on the next government to adopt expansionary fiscal policies. This could significantly impede the BOJ’s ongoing plans to adjust interest rates as it has been progressively tapering its monetary stimulus.
**Interviewer:** You mentioned the need for expansionary fiscal policies. Could you elaborate on what specific measures the new government might take?
**Saisuke Sakai:** Certainly. The incoming government will need to consider several options to relieve potential voter burdens. For instance, both the Democratic Party for the People and the Japan Innovation Party have advocated for lowering the consumption tax from 10% and implementing measures to lower utility bills. The pressure might also lead Prime Minister Ishiba to propose a supplementary budget exceeding 20 trillion yen, which is a significant increase from previous years.
**Interviewer:** With the changing political landscape, how might this influence the BOJ’s credibility and decision-making authority?
**Saisuke Sakai:** The BOJ requires a stable political environment to confidently pursue its goal of moving away from near-zero interest rates. The current political noise could lower the hurdle for further rate hikes by the end of the year. If the new caretaker government pushes back against the BOJ’s policies or seeks to impose additional mandates, this might impair the BOJ’s operational independence, thereby impacting its strategy moving forward.
**Interviewer:** We’re seeing some criticism directed at the BOJ’s recent rate hikes. How do you see the relationship between the new political opposition and the central bank’s policies evolving?
**Saisuke Sakai:** There is certainly room for tension. For instance, DPP leader Yuichiro Tamaki has criticized the BOJ for raising rates too soon. If parties such as the JIP seek to expand the central bank’s role beyond just price stability, it could shape the future of Japan’s monetary policies significantly. A shift in focus towards employment growth and overall economic stability could alter the BOJ’s strategic framework in response.
**Interviewer:** Thank you, Saisuke, for your insights. It sounds like a critical time for both the government and the central bank in Japan.
**Saisuke Sakai:** Thank you for having me. It is indeed a crucial moment, and the next few months will be pivotal in shaping both Japan’s economic policies and its recovery trajectory.
Monetary policy ambitions. However, the current political instability diminishes that stability. If the new government prioritizes fiscal measures over monetary tightening, it could lead to increased skepticism about the BOJ’s independence and its ability to manage inflation effectively. Furthermore, political noise may make it challenging for the central bank to navigate its rate hike strategy, as they’ll need to consider the potential backlash from a more aggressive monetary stance amid rising fiscal pressures.
**Interviewer:** What do you think will be the immediate challenge for the BOJ in the wake of these changes?
**Saisuke Sakai:** One immediate challenge will be the need to communicate clearly with the public and markets about its intentions despite the political disruption. The BOJ’s recent moves to raise rates were viewed as positive steps towards normalizing monetary policy, but with the recent election results, they will need to tread carefully. The central bank may find that raising rates is now a more complicated decision with potential political repercussions, especially if that leads to higher consumer prices or impacts economic growth.
**Interviewer:** Lastly, you mentioned the risk posed by a weak yen. How do you see this affecting economic policy in Japan in the short term?
**Saisuke Sakai:** A weak yen is indeed a headache for policymakers, as it directly contributes to rising import costs and fuels inflation. If the yen continues to weaken towards, say, 160 per dollar, it may force the BOJ’s hand to consider further rate hikes to counteract the depreciation. However, that would also be in direct conflict with the new government’s likely push for expansionary fiscal policies. Balancing these two pressures will be crucial in the upcoming months.
