Japan’s Incoming PM Ishiba Provides BOJ with Flexibility to Raise Rates

By Leika Kihara and Makiko Yamazaki

TOKYO – Japan’s incoming prime minister Shigeru Ishiba announced on Friday that the country’s monetary policy will largely remain accommodative, but indicated he would not oppose potential further increases in the still near-zero interest rates.

“We will deploy fiscal stimulus if necessary. There will also be no changes to Japan’s loose monetary policy,” Ishiba stated during a television interview. He further clarified that decisions regarding rate hikes should be made by the Bank of Japan, which is responsible for achieving price stability.

Ishiba mentioned that he would refrain from making specific requests to the Bank of Japan and would support the central bank’s efforts to gradually reduce stimulus measures, provided they are implemented with caution.

His comments followed his victory in the leadership race of the ruling party, effectively positioning him as the next prime minister due to the party’s strength in parliament.

In March, the Bank of Japan ended its negative interest rate policy and raised short-term borrowing costs to 0.25%, marking a significant shift away from a decade of aggressive stimulus strategies.

The yen strengthened on Friday, recovering from earlier losses after Ishiba, a former defense minister known for his critical stance towards past monetary policies, claimed victory in the ruling Liberal Democratic Party’s leadership election. He defeated Sanae Takaichi, a strong supporter of the former premier Shinzo Abe’s "Abenomics" policies, in the final round.

Ishiba is set to be formally chosen as the new prime minister by parliament on Tuesday and will establish a new cabinet the same day. During a news conference earlier on Friday, he highlighted the importance of the economy "fully emerging from deflation" and committed to enhancing the initiatives of Prime Minister Fumio Kishida aimed at increasing household income through wage increases.

He stressed that revitalizing consumption is crucial for Japan to escape economic stagnation, and the new administration must explore effective ways to alleviate the impact of rising inflation on households. “Japan’s gross domestic product has stagnated over the past two decades, with wage growth not keeping pace with inflation. Without increased consumption, the economy will struggle,” Ishiba remarked.

These statements suggest that Ishiba will likely continue many of Kishida’s economic policies, which focused on raising wages and endorsing the Bank of Japan’s gradual move away from expansive stimulus.

Analysts view Ishiba’s victory as potentially easing obstacles for the Bank of Japan in pursuing additional rate increases. “Ishiba’s leadership may offer the Bank of Japan greater leeway since he appears to have a neutral stance on monetary policy and is likely to honor the central bank’s decisions,” stated Kazutaka Maeda, an economist at Meiji Yasuda Research Institute. Maeda also predicted that the next rate hike could occur as early as December.

Takeshi Minami, chief economist at Norinchukin Research Institute, agreed, stating that Ishiba’s success will facilitate the Bank of Japan in normalizing monetary policy. “In terms of economic policy, Japan is moving away from Abenomics,” he noted.

Ishiba is expected to unveil a new stimulus package aimed at addressing food and fuel price concerns, which will be financed through a supplementary budget. Bank of Japan Governor Kazuo Ueda has indicated that the central bank will continue to raise rates if inflation remains poised to meet the 2% target, while also taking time to assess the impact of global economic uncertainties on Japan’s fragile recovery.