Japan’s government will call for monetary policy that bolsters private demand, a draft of its long-term economic blueprint reviewed by Reuters showed, signalling a preference for keeping borrowing costs low and setting up potential policy tensions with the central bank.
The draft urges the Bank of Japan (BOJ) to align its decisions with Prime Minister Sanae Takaichi’s drive to reflate growth, citing legal provisions requiring the central bank to coordinate policy with the government.
The unusually explicit language underscores the administration’s growing unease with further rate hikes as the BOJ exits years of ultra-loose policy. It also pledges the government will take “nimble and sufficient” steps to prevent a return to deflation while lifting long-term growth.
An Unusually Explicit Draft
“As the government seeks to achieve strong growth under its economic and fiscal policy, appropriate monetary policy that supports private demand through stable price rises is extremely important,” the draft says.
Most administrations have kept such language deliberately vague, but Takaichi’s draft breaks from that practice, explicitly calling for policy to support private demand and invoking the legal requirement for the BOJ to align with government policy, echoing Abenomics-style stimulus.
“While the phrasing is indirect, the language appears to push back against rate hikes and underscores the government’s caution against downside risks to the economy associated with any premature rate increases,” said former BOJ board member Takahide Kiuchi. Global central banks face mounting government pressure as the Iran war-induced energy shock heightens stagflation risks; even the Federal Reserve’s new chairman Kevin Warsh has little scope for the rate cuts Trump has demanded.
BOJ Independence In Focus
The blueprint, to be finalised in July, will be the first compiled by Takaichi, who has previously voiced reservations about weaning the economy off deflation-era stimulus. While Japanese law guarantees BOJ independence, it also mandates close coordination with the government.
The 10-year bond yield slid to 2.625% as the report offset hawkish remarks from board member Naoki Tamura, while the yen hovered near a four-decade low at 161.73 per dollar and the Nikkei jumped over 3.5%.
A Costly Growth Strategy
Since taking office in October, Takaichi has emphasised fiscal spending, pushing up bond yields amid concerns over Japan’s finances. Her growth strategy targets over 370 trillion yen ($2.3 trillion) in investment through 2040 across sectors like AI and chips — spending that would benefit from low rates even as inflation pushes the BOJ to tighten.
Political Pressure Mounts
The BOJ raised rates to a 31-year high of 1% this month, and Tamura called for hikes every few months. Yet a government representative at June’s meeting said the BOJ must take “proactive and appropriate action” if the economy worsens – a sign of displeasure over hikes. “The Takaichi administration has been refraining from making explicit comments pushing back against rate hikes so far this year. But the language of this draft offers a glimpse of its true feelings,” Kiuchi said. The BOJ next meets July 30-31, expected to hold rates steady while updating forecasts markets will scrutinise for signs of the next move.
(with input from Reuters)
