Japan junior coalition chief warns against political meddling in BOJ policy

By Takaya Yamaguchi and Leika Kihara

TOKYO, Feb 16 (Reuters) – Japan’s government should avoid meddling in monetary policy and focus on measures to build an economy strong enough to weather the potential pain of any further interest rate hikes, the leader of the ruling coalition’s junior partner told Reuters.

Japan should also proceed with a two-year suspension of the 8% tax on food sales as soon as possible and consider tapping into its huge foreign exchange reserves as one of the sources of revenue, said Hirofumi Yoshimura, who heads the Japan Innovation Party, or Ishin, which is a coalition partner of Prime Minister Sanae Takaichi’s Liberal Democratic Party. Yoshimura’s comments appeared to downplay some analysts’ view that Takaichi could backtrack on his promise to implement the plan at some point during the fiscal year that begins in April.

“As for rate hikes, that is something the BOJ should decide. Politicians should not intervene. The BOJ would make a decision by analyzing various market environments and through dialogue with the markets. I think the government should not meddle in the details,” Yoshimura said in an interview on Sunday, when asked about the possible timing of the next rate hike.

“If the BOJ were to raise interest rates, it could cause some pain, such as through (higher) mortgage rates. But looking at the current weak yen, it is possible that the central bank could raise them. Therefore, we need to create a strong economy, for example using the budget, so that it can cope with the impact,” Yoshimura said.

THE SALES TAX CUT IS COMING

The comments suggest the ruling coalition will seek to shore up growth with fiscal policies and avoid applying explicit pressure on the Bank of Japan (BOJ) to delay interest rate increases that could help keep unwanted declines in the yen at bay.

Japan currently applies a consumption tax rate of 8% on food and 10% on other goods.

After his party’s historic election victory on February 8, Takaichi renewed his promise to suspend the food sales tax for two years to cushion the blow of rising costs of living on households, a move that will leave a gaping hole in state revenues and worsen Japan’s already shattered finances. He said the government will try to implement the tax holiday by fiscal year 2026, after discussing details such as timing and financing at a meeting of ruling and opposition parties.

“It is possible to achieve this during fiscal year 2026. We need to do it as soon as possible,” Yoshimura said, reiterating Takaichi’s call to seek financing through non-tax revenues, as well as cuts to wasteful spending and subsidies.

“Japan’s surplus foreign exchange reserves are also non-tax revenue, so they will probably be considered as an option,” he said, echoing comments made by Finance Minister Satsuki Katayama last week.

Yoshimura’s comment raises the possibility that the government will tap into Japan’s $1.4 trillion foreign currency reserves, a priority war chest for future yen interventions, to finance its fiscal and spending initiatives without issuing new debt.

MARKETS WATCHING THE WEAK YEN

Takaichi’s landslide election victory has heightened market attention on whether she will renew her calls for expansionary fiscal and monetary policies, which she was forced to tone down after a sell-off in the yen and government bonds late last year driven by market concern over Japan’s worsening finances.

The BOJ’s decision to raise interest rates to 0.75% in December also received little pushback from the Takaichi administration, in a sign of the prime minister’s sensitivity to falls in the yen, which raise import costs and inflation generally. While the yen has recovered since the election, markets are pricing in the possibility of another rally in April.

Yoshimura said it was difficult to say whether the weak yen was good or bad for the Japanese economy, as it benefits export companies but raises the cost of living for households.

Asked whether authorities should intervene in the currency market to prop up the yen should it fall below the “psychologically important” level of 160 to the dollar, he said: “It is inappropriate to say what measures should be taken at a certain level of the yen. But it is important that authorities take appropriate and timely measures.” The dollar was trading at 152.66 yen in Asia on Monday morning, having gained almost 3% last week in its biggest rise since November 2024.

(Reporting by Takaya Yamaguchi and Leika Kihara; editing by Lincoln Feast)