Japan’s opposition leader Yoshihiko Noda told Reuters on Friday that the Bank of Japan must raise interest rates and gradually end its controversial stimulus programme, which has been linked to yen depreciation.
Noda said in an interview that Japan needs to focus more on getting its fiscal house in order by ending big, crisis-mode spending and finding ways to boost tax revenues, such as raising the capital gains tax rate.
The remarks underscore the hope of Noda’s Constitutional Democratic Party of Japan to capitalise on growing public discontent over the rising cost of living, driven partly by higher import costs from a weak yen.
They also highlight the party’s resolve to differentiate itself from the ruling coalition’s focus on underpinning the economy with big spending plans.
Noda, who served as prime minister from 2011 to 2012, criticised former BOJ Governor Haruhiko Kuroda’s decade-long, radical stimulus programme – deployed in 2013 – for side effects including excessive yen weakness.
While the BOJ dismantled most of Kuroda’s stimulus in March, it has not completely left it behind and is persisting unnecessarily in pursuing its target of boosting inflation to a sustainable rate of 2%, Noda said.
The weak yen, caused partly by sticking to Kuroda’s stimulus for too long, has done more harm than good to Japan‘s economy by pushing up import costs and hurting households, he said.
“It is wrong to focus too much on keeping monetary policy ultra-loose when Japan is experiencing inflation,” he added. “The BOJ should raise interest rates gradually without committing to hike at a set pace.”
Noda said the central bank should hike cautiously with a close eye on economic and overseas developments.
While short of a majority, the Constitutional Democrats significantly increased their seats in Japan’s powerful lower house in a general election on Oct. 27. Prime Minister Shigeru Ishiba’s ruling Liberal Democratic Party, by contrast, suffered a defeat that forced him into a minority coalition.
With his party’s increased clout after the election, Noda has set his sights on winning more seats in an upper house election to be held in the middle of next year. He has repeatedly vowed to bring his party to power and become prime minister again.
Noda, who has also served as finance minister, criticised Ishiba’s ruling party for relying too heavily on big spending plans and under-estimating the cost of adding to Japan’s already huge public debt pile.
“If Japan loses market trust over its finances, the economy will face serious challenges,” such as a potential downgrade in its sovereign debt ratings, Noda said.
“Japan needs fiscal discipline,” he said, adding that raising the capital gains tax, the corporate tax, and the income tax on wealthy households could be among options to increase revenues.
Under incumbent Governor Kazuo Ueda, the BOJ exited Kuroda’s radical stimulus in March and raised short-term interest rates to 0.25% in July, on the view that Japan was progressing towards durably achieving its 2% inflation target.
Ueda has signalled his readiness to keep raising interest rates if the economy moves in line with the BOJ’s forecast, leading markets to bet on another hike to 0.5% by March of next year.
Ishiba’s administration plans to spend 13.9 trillion yen ($92.62 billion) for a package of steps to cushion the blow from rising living costs. It is also expected to accede to demands from one of Japan’s smaller opposition parties for permanent tax breaks, which analysts say may cut next year’s tax revenues by up to 4 trillion yen.
Those could increase the burden, already heightened by the BOJ’s exit from ultra-low interest rates, of funding Japan’s 1,100-trillion-yen debt pile – the biggest among advanced nations and nearly double the size of its economy.
(With inputs from Reuters)
