The Bank of Japan must raise interest rates and continue phasing out a controversial stimulus program blamed for causing unwelcome yen declines, Yoshihiko Noda, leader of the Constitutional Democratic Party of Japan, said Friday.
Noda said in an interview that Japan needs to focus more on getting its fiscal house in order by ending big, crisis-mode spending and finding ways to boost tax revenues, such as by raising the capital gains tax rate.
The remarks underscore the hope of Noda's party, the second largest force in parliament, to capitalize on growing public discontent over the rising cost of living, driven partly by higher import costs from a weak yen.
They also highlight the party's resolve to differentiate itself from the ruling coalition's focus on underpinning the economy with big spending plans.
Noda, who served as prime minister from 2011 to 2012, criticized former BOJ Gov. Haruhiko Kuroda's decadelong, radical stimulus program — deployed in 2013 — for side effects including excessive yen weakness.
While the BOJ dismantled most of Kuroda's stimulus in March, it has not completely left it behind and is persisting unnecessarily in pursuing its target of boosting inflation to a sustainable rate of 2%, Noda said.
The weak yen, caused partly by sticking to Kuroda's stimulus for too long, has done more harm than good to Japan's economy by pushing up import costs and hurting households, he said.
"It is wrong to focus too much on keeping monetary policy ultraloose when Japan is experiencing inflation," he added. "The BOJ should raise interest rates gradually without committing to hike at a set pace."
Noda said the central bank should hike cautiously with a close eye on economic and overseas developments.
While short of a majority, the CDP significantly increased its seat count in the powerful Lower House in a general election on Oct. 27. Prime Minister Shigeru Ishiba's ruling Liberal Democratic Party, by contrast, suffered losses that forced the party into a minority coalition.
With his party's increased clout after the election, Noda has set his sights on winning more seats in an Upper House election to be held in the middle of next year. He has repeatedly vowed to bring his party to power and become prime minister again.
Noda, who has also served as finance minister, criticized Ishiba's ruling party for relying too heavily on big spending plans and underestimating the cost of adding to Japan's already huge public debt pile.
"If Japan loses market trust over its finances, the economy will face serious challenges," such as a potential downgrade in its sovereign debt ratings, Noda said.
"Japan needs fiscal discipline," he said, adding that raising the capital gains tax, the corporate tax and the income tax on wealthy households could be among the options to increase revenues.
Under incumbent Gov. Kazuo Ueda, the BOJ exited Kuroda's radical stimulus in March and raised short-term interest rates to 0.25% in July, on the view that Japan was progressing toward durably achieving its 2% inflation target.
Ueda has signaled his readiness to keep raising interest rates if the economy moves in line with the BOJ's forecast, leading markets to bet on another hike to 0.5% by March of next year.
Ishiba's administration plans to spend ¥13.9 trillion ($92.62 billion) for a package of steps to cushion the blow from rising living costs. It is also expected to accede to demands from the Democratic Party for the People for permanent tax breaks, which analysts say may cut next year's tax revenues by up to ¥4 trillion.
Those could increase the burden, already heightened by the BOJ's exit from ultra-low interest rates, of funding Japan's ¥1.1 quadrillion debt pile — the biggest among advanced nations and nearly double the size of its economy.
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