The Bank of Japan's Interest Rate Debate

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) – The Bank of Japan (BOJ) should raise interest rates to at least 1% to reverse an overly large stimulus causing the yen's decline, according to Takeshi Shina, shadow finance minister of Japan's largest opposition party.

Shina emphasized the need for the central bank to normalize monetary policy and communicate its intentions clearly. The current short-term policy rate of 0.25% significantly lags behind levels considered neutral for the economy.

He stated, "The BOJ's mandate is to achieve price stability but that isn't being met, as the huge U.S.-Japan interest rate gap is causing yen falls that push up the cost of living."

Shina suggested a gradual increase in rates to 1% to mitigate excessive monetary stimulus. He is known for frequently questioning BOJ governors, including Kazuo Ueda, about monetary policy in parliament.

Concerns over a weak yen will likely remain a contentious issue among politicians, affecting the timing of future BOJ interest rate hikes. Shina mentioned that Japan's neutral interest rate is at least 1%, and raising rates to that level should not be viewed as monetary tightening but rather as a reduction of overly accommodating measures.

Raising Japanese rates could help address the declining yen, which has inflated import costs, increased living expenses, and hindered real wage growth. Shina noted, "Except for a handful of big manufacturers, no one in Japan is happy about current yen levels."

On Thursday, the dollar surpassed 156 yen for the first time since July, fueled by expectations that U.S. President-elect Donald Trump’s policies may drive inflation and extend the Federal Reserve's rate-cutting cycle. Since 2020, the yen has depreciated approximately 30% against the dollar, as per BOJ data.

Shina is part of the Constitutional Democratic Party of Japan (CDPJ), which gained influence after a recent general election victory on October 27, despite not achieving a majority in seats.

The CDPJ has criticized former BOJ Governor Haruhiko Kuroda’s aggressive monetary stimulus measures, implemented in 2013, for adversely affecting financial institution profits and market functionality.

Shina proposed that the BOJ should replace its 2% inflation target with a more flexible goal, which would allow for adaptable policy shifts as long as price growth remains positive.

He called for collaboration between the BOJ and the government to facilitate positive real wage growth, stressing the importance of a normalized monetary policy alongside an appropriate price goal.

The BOJ exited Kuroda's stimulus in March and raised short-term rates to 0.25% in July, believing Japan was nearing sustainable achievement of its 2% inflation target. Ueda cited inflationary risks from the weak yen as a factor in July's rate hike decision.

A Reuters poll from October 3-11 revealed that a slim majority of economists expect the BOJ to refrain from further rate hikes this year, though nearly 90% anticipate rate increases by the end of March. The BOJ's next rate review is scheduled for December 18-19, with another planned for January 23-24.