MNI POLICY: BOJ Sees Hikes Intact, Despite Takaichi Win

Japanese Prime Minister Sanae Takaichi has been taking market concerns over inflation and fiscal sustainability seriously and will not interfere with the Bank of Japan’s gradual policy tightening from the current 0.75%, MNI understands.

Takaichi, whose coalition secured a two-thirds supermajority in Sunday’s general election, maintains that decisions on raising borrowing costs rest with the BOJ, despite her strong mandate to tackle the cost-of-living crisis. 

While she retains her fiscal expansion stance, Takaichi is paying close attention to market reactions to government policy, having learned a severe lesson from market turmoil in December driven by fiscal concerns. 

Despite her preference for low interest rates, she is likely to support further BOJ rate hikes not only to fight inflation but also to achieve the 2% target, as households continue to suffer from high living costs.

Government data released Monday showed inflation-adjusted real wages – a key measure of households’ purchasing power – remained in negative territory in December for the 12th consecutive month, falling 0.1% after a 1.6% decline in November, highlighting that wage growth has not kept pace with inflation and leaving households under continued pressure from elevated costs.

However, real wages are likely to turn positive in the coming months as the year-on-year rise in headline CPI slows due to government measures, potentially enabling the bank to continue raising the policy rate.

JGB MARKET

Takaichi's government also recognises it would be inappropriate to call on the BOJ to purchase JGBs to cap yields, as such a move could backfire by undermining market sentiment and increasing volatility, according to the BOJ’s view.

While the Bank is facing the challenge of coping with rising JGB yields driven by concerns over fiscal expansion and sustainability, officials believe the BOJ should refrain from intervening in the JGB market unless its functioning deteriorates significantly. (See MNI POLICY: BOJ Sees Little Chance Of JGB Intervention)

Takaichi will also decide on a successor to BOJ board member Asahi Noguchi, whose term ends March 31, with market participants focused on whether she selects a dovish candidate. (See MNI POLICY: Concerns Grow Over Takaichi's BOJ Board Picks) Another board member, Junko Nakagawa, sees her term expire on June 29.