(Bloomberg) -- The Bank of Japan should exercise caution when considering further interest rate hikes to ensure the country truly defeats deflation, according to Japan’s incoming Minister for Economic Revitalization Ryosei Akazawa.
Akazawa spoke to reporters after new Prime Minister Shigeru Ishiba’s cabinet was officially announced. Akazawa is known for his close ties to Ishiba, who won the ruling party’s closely contested leadership race last week.
“I want the BOJ to judge things with caution,” Akazawa said. “We absolutely mustn’t do anything to cool the economy in any way for the time being. My thinking is that defeating deflation should be the top priority.”
Akazawa’s comments strengthen the view that Ishiba’s government isn’t seeking further normalization of policy for now, days after Ishiba said it’s not time to talk about further rate hikes. The remarks are likely to further cement the view among market participants that the central bank won’t raise interest rates at the end of this month.
In another sign that the new administration may favor ramping up support for the economy over policy normalization with an election looming, New Finance Minister Katsunobu Kato hinted that the government will put together a supplementary budget. Ishiba said Monday that he would seek a general election on Oct. 27.
Before Ishiba’s unexpected victory in Friday’s ruling party leadership contest, most economists had expected a further rate hike from the central bank by January. The BOJ has repeatedly emphasized that it will increase rates if data align with its outlook.
While Japan’s key inflation gauge has remained at or above the BOJ’s target 2% level for over two years, the government has yet to officially declare an end to deflation, citing risks that the country could still slip back into a state of falling prices.
Akazawa said the need to completely rid the economy of deflation had not changed, adding that real wages have only just started rising in the last few months. The comments suggest it will take some time before the new administration is confident that the threat of price weakness has been overcome.
The comments from Akazawa and Kato also suggest the new administration is keen not to rattle financial markets, following a sharp gain in the yen and a stock rout in the wake of Ishiba’s surprise win over BOJ easing backer Sanae Takaichi.
“I would like to try to communicate appropriately with markets as they are paying close attention to how the new administration will manage the economy,” Kato said. “We have received clear instructions to aim for a growth-oriented economy. We are also promoting Japan as an investment destination.”
--With assistance from Toru Fujioka, Akemi Terukina and Yui Hasebe.
(Updates with finance minister’s comments)
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