Political shake-up in Japan includes BOJ, monetary policy outlook by Reuters
by Makiko Yamazaki
TOKYO (Reuters) – The loss of the ruling party in Japan's parliament has raised the prospect that the new government will need to raise funds and potential problems with raising interest rates for central banks.
Prime Minister Shigeru Ishiba's ruling Liberal Democratic Party (LDP) and his longtime partner Komeito failed to retain a majority in lower house elections over the weekend, raising doubts about how long the 67-year-old prime minister can keep his job.
“No matter who is in charge, the new government will be forced to adopt expansionary fiscal and monetary policies to avoid burdening voters,” said Saisuke Sakai, senior economist at Mizuho Research and Technologies.
To remain firmly in power, the LDP, which has ruled Japan for almost its entire post-war history, will likely need to negotiate with smaller opposition parties, such as the Democratic Party for the People (DPP) and the Japan Innovation Party (JIP), as coalition partners or at least policy-based coalitions.
Both small parties have ruled out forming a coalition with the LDP but said they are open to policy cooperation.
In their election campaigns, the DPP and JIP promised to reduce consumption tax from 10%. The DPP's proposals included a cut in utility bills and a tax on low income earners.
Although Ishiba has already proposed an additional budget of more than 13 trillion yen ($85 billion), he may face pressure to get a package of more than 20 trillion yen, Sakai said.
'THE VOICE OF POLITICS'
Growing political unrest could complicate the Bank of Japan's bid to pull the economy out of 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 assumption that Japan was making progress in sticking firmly to its 2% inflation target.
BOJ Governor Kazuo Ueda has vowed to continue raising rates and economists don't see a major immediate change in the direction of broad policy.
However, a significant new parliamentary structure could rob the BOJ of the political stability it needs to move easily from near-zero interest rates, analysts say.
“The bar is high for the BOJ to raise interest rates again later this year in this political climate,” said Masahiko Loo, a fixed income strategist. State Street (NYSE:) Global Advisors.
DPP leader Yuichiro Tamaki criticized the BOJ for raising rates prematurely.
The JIP proposes legislative changes that would authorize the central bank for purposes beyond price stability, such as a sustainable economic growth rate and increased employment opportunities.
On the other hand, the main opposition party, the Constitutional Democratic Party of Japan, has called for the BOJ's inflation target to be lowered to one “zero” from the current 2%, which would reduce the scope for further rate hikes.
At the same time, a weak yen could be a headache for Japanese policymakers by raising the cost of imported raw materials, raising inflation and hurting consumption.
If the yen weakens to 160 per dollar, the BOJ “will be pressured to raise rates again to stem the weakness of the Japanese currency,” said Takeshi Minami, senior economist at the Norinchukin Research Institute.
Demand for another rate hike could increase if the yen's decline is accelerated by Donald Trump's victory in the US presidential election on November 5, he added.
Trump's tariffs and stricter immigration policies are seen as inflationary, which could reduce the demand for a US rate cut, and boost the dollar against the yen.
“Visibility is very low for the BOJ,” Minami said.
($1 = 153.5700 yen)
