Hayashi: BOJ's Rate Hike Plans Align with Government's Economic Policy

Hayashi: BOJ and Government in Sync on Monetary Policy

Japanese Chief Cabinet Secretary Yoshimasa Hayashi, a candidate for the leadership of the ruling Liberal Democratic Party (LDP), told Reuters that the Bank of Japan's (BOJ) plans to gradually raise interest rates are largely in line with the government's economic policy thinking. This statement reflects an alignment between the government and the central bank on how to address inflation and promote sustainable economic growth.

Asked if a rate cut by the U.S. Federal Reserve would push the yen higher against the dollar, hurting Japan's export-reliant economy, Hayashi said Japanese policymakers were no longer bound by such inherent assumptions. He indicated that traditional concerns about a "strong yen" have diminished, as the focus now shifts to addressing inflation caused by rising import costs.

Shift in Views on Yen and Inflation

Hayashi explained that the focus has shifted from traditional concerns about a "strong yen" and "deflation" as obstacles to economic growth, to addressing the "weak yen" and the resulting high inflation. He noted that rising oil prices after the Russia-Ukraine conflict, in addition to rising wages and rice prices in Japan, have contributed to cost-push inflation, rather than demand-pull inflation.

BOJ's Commitment to Raising Interest Rates

Hayashi pointed out that BOJ Governor Kazuo Ueda has signaled the central bank's intention to gradually raise interest rates to a "neutral level for the economy." He emphasized that the BOJ is in close communication with the government and is implementing monetary policy in line with the government's direction.

Divergence of Views Among LDP Leadership Candidates

Hayashi's comments come ahead of the LDP leadership election on October 4, where candidates are vying to succeed outgoing Prime Minister Shinzo Abe. The election has sparked market interest and pushed Japanese government bond yields higher, amid expectations that the next leader may increase fiscal spending.

While Hayashi stressed the need to consider Japan's "small output gap" and avoid issuing debt to finance spending, another candidate, Sanae Takaichi, has taken a contrasting stance, promising to "expand fiscal spending" as part of her plan to boost economic inflation.

Conclusion

Hayashi's statements suggest that the Japanese government and the BOJ are aligned on the need to address inflation and promote sustainable economic growth. However, there remains a divergence of views on how to achieve this, particularly regarding fiscal spending. The LDP leadership election will be crucial in determining the course of Japanese economic policy in the future.