Japanese PM Urges Wages-Driven Inflation for Economic Stability

Japanese Prime Minister Sanae Takaichi expressed her strong desire for the central bank to achieve inflation driven by wages rather than by rising food costs to maintain low interest rates. During a parliamentary session, Takaichi highlighted the ongoing risk of deflation, which could lead to reduced household spending, decreased corporate profits, and reluctance from businesses to increase wages. She criticized recent inflation, mainly attributed to higher food costs, fearing its adverse impact on the economy.

Takaichi emphasized the need for moderate inflation alongside wage growth, emphasizing the current undesirable nature of inflation trends. The government plans to develop a set of measures to offset the impact of rising living expenses, stimulate investment in growth sectors, bolster corporate profits, and improve consumer confidence. Takaichi underlined the importance of fostering a robust economy and called for close coordination with the Bank of Japan to achieve sustainable and stable inflation growth.

The Prime Minister’s remarks, aligning with her advocacy for expansive fiscal and monetary policies, underscore the challenges faced by the Bank of Japan. Prior to Takaichi’s recent comments, her administration’s preference for maintaining low interest rates and implementing fiscal stimulus had complicated the timing of potential rate hikes by the central bank. While the BOJ retained its 0.5% interest rate last month, Governor Kazuo Ueda hinted at a possible rate hike in December if convinced that companies would continue to increase wages.

Despite market expectations of an upcoming rate hike in December or January, a delay could result in yen depreciation, subsequently driving up import costs and overall inflation. Finance Minister Satsuki Katayama acknowledged the downsides of a weak yen outweighing the benefits, attributing the currency’s decline to increased raw material expenses. Katayama highlighted the need for heightened vigilance regarding one-sided movements in the foreign exchange market.

While a weak yen can enhance exports, policymakers are concerned about its impact on importing essential resources like fuel, food, and raw materials. With core consumer inflation at 2.9% in September, surpassing the BOJ’s 2% target due to elevated food prices, there is consistent pressure on the central bank to elevate borrowing costs. Conversely, some BOJ members are apprehensive about Japan’s fragile economic condition, with analysts projecting a 2.5% annualized contraction in the third quarter, partly attributed to increased U.S. tariffs.