Ex-BOJ Chief Kuroda Calls for Rate Hikes, Tighter Fiscal Policy

• Japan must keep raising interest rates and tighten fiscal policy as the economy is already in "great shape," former central bank chief Haruhiko Kuroda said, warning that Premier Sanae Takaichi's big spending plan could stoke an inflationary upswing.
• With the economy enjoying solid growth and steady wage gains, the Bank of Japan (BoJ) can probably raise interest rates about twice a year in 2026 and 2027, said Kuroda. "When Abenomics was deployed, Japan was suffering from deflation and a strong yen. Now, Japan is experiencing inflation and a weak yen. Japan needs to move toward tighter fiscal and monetary policy," he added.
• According to Kuroda, "The BoJ must gradually raise interest rates towards levels deemed neutral to the economy. Fiscal policy must be tightened, too," The remarks highlight how Japan’s evolving economic landscape has driven a striking divergence in policy thinking between Kuroda, Abenomics’ most ardent architect, and its current torchbearer, Takaichi.
• With inflation above its 2% target for years and a tight job market pushing up wages, the BoJ exited Kuroda's stimulus in 2024 and raised rates several times, including in December. Fiscal policy, by contrast, is likely to stay expansionary. A fan of Abenomics, Takaichi has ramped up spending and pledged to suspend by two years an 8% sales tax on food to cushion the blow to households from rising living costs.
• Kuroda warned that such expansionary fiscal policy could backfire by fuelling inflationary pressure and pushing up bond yields. "It makes sense for the government to support innovation to boost long term potential growth. But spending money to cushion the blow from rising living costs would be counterproductive as doing so would fuel inflation," he said.
• The BoJ may see scope to raise its key policy rate, currently at 0.75%, to around 1.5-1.75% in coming years if the economy can sustain its momentum.

(Source: Reuters)