Introduction to Japan’s Economic Situation
Japan’s central bank may face political pressure to keep interest rates low for longer than it wants, as opposition parties favoring tax cuts and loose monetary policy are expected to gain influence after a July 20 election. This could have significant implications for the country’s economy, which is already struggling with a large government debt burden.
The Upcoming Election and Its Impact
Opinion surveys suggest Prime Minister Shigeru Ishiba’s coalition may lose its majority in the upper house of parliament, forcing it to court an array of smaller parties pushing for easier fiscal and monetary policy. The governing bloc led by Ishiba’s Liberal Democratic Party is already a minority in the more powerful lower house, so a stalemate in both chambers could give opposition parties outsized influence in policy decisions.
The Role of the Bank of Japan
Ishiba has supported the Bank of Japan’s policy of gradually lifting interest rates from near zero as inflation picks up in the world’s fourth-biggest economy, while trying to curb the biggest government debt burden in the industrial world. However, if opposition groups gain traction with their pressure on the BOJ to avoid rate hikes and for the government to cut the sales tax, that could boost bond yields and complicate the bank’s efforts to normalize monetary policy, some analysts say.
Potential Consequences of Political Pressure
The BOJ declined to comment on the potential impact of the election on monetary policy. However, analysts such as Daiju Aoki, chief Japan economist at UBS SuMi Trust Wealth Management, believe that there is a 50% chance the ruling coalition could lose its majority in the upper house, which could lead to increased debate about cutting Japan’s consumption tax rate. This would push up Japan’s long-term interest rates by stoking concern over the country’s finances.
The Debt Burden
Japan’s public debt is equal to 250% of gross domestic product, far above that of Greece at 165%. The government spends nearly a quarter of its budget to finance a 1,164-trillion-yen ($7.9-trillion) debt pile, with the cost expected to rise steadily as the BOJ exits zero-interest rates. This debt burden is a significant concern for the country’s economy and could be exacerbated by political pressure to cut taxes and keep interest rates low.
Opposition Parties’ Policies
Sohei Kamiya, head of the upstart right-wing party Sanseito, has criticized the BOJ for slowing its bond buying when the economy remains weak. Another small group, the Japan Innovation Party, wants the BOJ to go slow in raising rates to restrain the cost of interest on the government’s debt. Yuichiro Tamaki, head of the Democratic Party for the People, has urged the BOJ to loosen, not tighten, monetary policy to keep the yen from rising and hurting the export-reliant economy.
Conclusion
In conclusion, Japan’s upcoming election could have significant implications for the country’s economy, particularly with regard to interest rates and government debt. The potential for political pressure to keep interest rates low and cut taxes could boost bond yields and complicate the BOJ’s efforts to normalize monetary policy. As Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, notes, "We may need to brace for a long period of political uncertainty and market volatility." This uncertainty could have far-reaching consequences for Japan’s economy and its ability to manage its significant debt burden.
