Japanese opposition warns against early rate hike by Bank of Japan

TOKYO – The Bank of Japan should avoid overhauling its ultra-loose monetary policy now, the head of the opposition Kingmaking Party said on Tuesday, a sign that the ruling coalition’s crushing defeat in a weekend election is complicating its rate hike plan.

With the composition of Japan’s future government in flux, political uncertainty could force the Bank of Japan to delay raising interest rates until at least the end of 2024, some analysts say.

Yuichiro Tamaki, head of the opposition Democratic People’s Party (DPP), said policymakers should focus on whether real wages will turn positive when crafting fiscal and monetary policies.

“Real wages turned negative in August and are still stagnant. Japan’s economy is at a critical stage, so the Bank of Japan should avoid major policy changes now,” Tamaki told a news conference.

“Once there is confidence that real wages will rise above 4% at next year’s spring wage talks, then the BOJ will be able to reconsider monetary policy,” he said.

The remark by Tamaki, whose party became king after the ruling coalition lost its majority in elections over the weekend, underscores the challenge the Bank of Japan faces in exiting ultra-loose monetary policy.

Japan’s largest labor group has vowed to push for a wage rise of at least 5% in 2025, similar to a big hike this year, although economists doubt another such jump is realistic.

The Bank of Japan is expected to keep short-term rates at 0.25% at its policy meeting on Thursday but will signal its determination to continue raising borrowing costs if Japan makes progress toward its long-term inflation target of 2%.

A slight majority of economists polled by Reuters expect the government to hold off on a rate hike this year, although most expect it to happen by March.

Shigeru Ishiba, who became prime minister on Oct. 1 after winning the ruling party leadership race, is seen as a proponent of normalizing the Bank of Japan’s policies.

But the ruling coalition’s failure to maintain a majority in Sunday’s lower house elections will likely force Ishiba’s Liberal Democratic Party to seek smaller opposition parties such as the DPP to remain in power.

The DPP quadrupled its number of seats in the lower house while campaigning for higher real wages and household incomes, including through tax cuts. He also criticized the Bank of Japan’s efforts to raise rates.

“The growing influence of opposition parties in favor of maintaining an accommodative monetary policy could increase the likelihood of the BOJ delaying further rate hikes,” said former BOJ board member Takahide Kiuchi.

With his policy position weakened by the dismal election results, Ishiba himself may become more cautious about early rate hikes by the Bank of Japan, said Shigeto Nagai, head of Japanese economics at Oxford Economics.

“While we continue to forecast the Bank of Japan’s next rate hike in December, there is a significant risk of some delay,” he said. REUTERS