Japan Ruling Coalition Executive Calls For BOJ Focus on Weak Yen

(Bloomberg) -- The Bank of Japan should pay close attention to currency levels because its efforts to hold down interest rates are weakening the yen, according to a senior member of the Japanese ruling coalition party Komeito.

“From the point of view of the economy, I understand why they are holding down interest rates,” said Keiichi Ishii, secretary general of Komeito, the junior partner to Prime Minister Fumio Kishida's ruling Liberal Democratic Party.

“But the side effects of that are reflected in exchange rates,” he said in an interview with Bloomberg News in Tokyo on Friday. “How far can the side effects be tolerated? If the yen goes too low, things will be tough, so I want the BOJ to pay close attention to exchange rates.”

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The central bank has been forced repeatedly to scoop up more Japanese government debt as the global sell-off in bonds put pressure on Japan's yields. The differential between U.S. and Japanese yields helped push the yen as low as 125 against the dollar last week for the first time since August 2015.

Weakness in the yen is amplifying the impact of soaring energy prices that are squeezing households and businesses, a factor that could fuel discontent among voters ahead of a summer election. 

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A poll carried out by broadcast news network JNN April 2-3 found about two thirds of respondents said price rises were affecting their livelihoods. Almost 60% called for measures to reduce gasoline taxes. 

While Komeito's No. 2 didn't specify what the central bank should do if the yen weakens further, some BOJ watchers see the possibility of the bank tweaking policy by raising the ceiling on 10-year yields through a widening of its bond yield target range.

“In the past, a cheaper yen was seen as a benefit for Japan's exporters, but at this point it's coming as prices for various things are starting to rise,” Ishii said. “It could worsen already rising prices, so the lower yen is starting to become negative.”

While Japan's inflation rates remain low by comparison with other major economies, the sharply higher fuel prices are putting pressure on lower-income households, who form a key constituency for the Buddhist-backed Komeito party. 

Ishii spoke amid speculation over who will replace Haruhiko Kuroda at the head of the bank and whether a new governor would change policy. Kuroda's decade in office is set to end in a year.

The next governor must be someone able to achieve a successful exit from its policies, Ishii said. He emphasized the selection is up to the government and the ruling parties can do nothing more than make their wishes known. 

“The current policies of Mr. Kuroda cannot be continued indefinitely into the future,” he said. “The next governor will need to seek an exit. So we need someone who can do that skillfully.” 

Kishida Orders Measures to Shield Voters From Energy Cost Impact

While the LDP has an outright majority in the powerful lower house of parliament, it has an agreement to consult on policy with its partner Komeito. The group often mobilizes its members to support the LDP in constituencies where it doesn't have a candidate, and an upper house election is due in three months.  

Ishii's party has called on the government to draw up an extra budget in the current session of parliament to help bolster the economy, amid uncertainty over the effects of the war in Ukraine and a resurgence of Covid cases. 

Kishida instructed officials last week to draw up economic measures aimed at countering the effect of sharp rises in fuel and other prices that could undermine voter support ahead of the election. 

The government will initially focus on using reserves to introduce such measures quickly, he told parliament.

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