(Bloomberg) -- The Bank of Japan likely won’t change policy abruptly enough to derail budget discussions, according to a senior member of an opposition party whose support is needed by Prime Minister Shigeru Ishiba’s minority government.
While the BOJ shouldn’t rush any interest rate hikes when the economy is at a renewed risk of falling back into deflation, the central bank is unlikely to do something that interferes with the formulation of the budget, Democratic Party for the People tax chief Motohisa Furukawa said in an interview on Wednesday.
Asked if a possible December rate hike would make the DPP less cooperative on budgetary matters, Furukawa played down the likelihood of the BOJ moving so quickly it would have a detrimental impact on public borrowing costs. It’s “unthinkable” that rate hikes will be rapid, given the central bank carefully mulls its effect on Japan’s finances and the government leaves an ample buffer in calculating interest payments on its debt, Furukawa said.
“The government and the BOJ won’t do anything that would have that impact,” the former Finance Ministry official said.
Just over half of economists surveyed by Bloomberg expect the BOJ’s next rate hike to come next month. While DPP leader Yuichiro Tamaki earlier said that he’s against any rate hikes before March, Furukawa declined to specify how long the BOJ should hold off on raising rates, making the opposition party’s stance less clear.
The small party has gained leverage over the ruling coalition after winning enough seats to be able to help Ishiba’s minority government pass legislation. While downplaying the impact of monetary policy changes on budgets, Furukawa emphasized the risk of premature rate hikes on the economy.
“A rate hike now will hit the private sector, households and government finances negatively,” said Furukawa, who also thinks the hike won’t do much to slow the yen’s weakness. “When you consider all the diverse factors comprehensively, this isn’t a situation where the BOJ can raise rates rapidly.”
The budget talks are complicated by the DPP’s insistence on raising the country’s tax-free income ceiling, a move the Finance Ministry says could create a hole in tax receipts of up to ¥8 trillion ($53 billion).
Increasing the tax threshold would boost people’s disposable income and encourage those in part-time jobs to work more hours in the year, according to the small party. Putting more money in people’s pockets is a priority when the economy faces a renewed risk of deflation, Furukawa said. Some retailers are already starting to cut prices to lure consumers fatigued with persistent inflation, he said.
The DPP wants to raise Japan’s income-tax free ceiling from ¥1.03 million to ¥1.78 million, based on how much the minimum wage has risen since 1995. The proposal resonated with young part-time workers in October’s national election because many stop taking on work toward the end of the year to avoid earning beyond a ¥1.03 million threshold for taxation that also removes tax breaks for their parents. Young voters played a key role in quadrupling the DPP’s lower house seats to 28 in the election.
Other less expensive tax ceilings floated in media reports include ¥1.13 million based on inflation since 1995 and ¥1.16 million, a figure based on the equivalent rise in employee compensation.
In the interview Wednesday, Furukawa didn’t indicate whether he will be willing to accept or reject those alternatives.
Tamaki has said the tax loss from its full proposal would be nearer ¥4 trillion to ¥5 trillion. Most of the expense would be offset by a revenue boost via higher consumption prompted by the change, Tamaki said.
The DPP doesn’t have actual calculations on the positive impact for consumption, Furukawa said. Neither is it in charge of figuring out how to make up for the projected tax loss in overall budget and tax discussions, as the ruling coalition takes the lead over those matters, he added.
Still, the DPP hopes that boosting people’s disposable income will help the private sector drive growth. That will buck a long-held trend in the Japanese economy over the past few decades during which the government continued to pile up public debt to stimulate growth while households kept saving given their stagnant wages.
Japan’s debt is projected at 251% of its gross domestic product this year, while household assets hit a record ¥2,212 trillion — about four times the country’s real GDP.
The DPP is open to issuing more debt to help the economy in the short-term, according to Furukawa.
“During 30 years of deflation, there are things that have become ingrained in people’s consciousness — for example that prices and wages don’t rise,” he said. “We need to make sure that wages continue to rise steadily, exceeding inflation, and we need to make that sustainable.”
--With assistance from Shery Ahn.
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