Japan’s New PM Ishiba Forms Stability First Cabinet, Seeks Smooth Ties with Central Bank

By Max Sato

(MaceNews) – Prime Minister Shigeru Ishiba is seeking to establish close coordination with Bank of Japan policymakers as he was sworn in on Tuesday with an aging, male-dominated cabinet that still symbolizes stability among a largely conservative voting population.

Hailing from a political family, Ishiba, 67, vowed to provide a sense of security to the public and stability in Asia based on a 72-year-old security treaty with the U.S. He is basically inheriting his predecessor’s goal: to create more opportunities for youth, women and rural residents, ensure full support to households raising children and facilitate sustainable wage hikes.

Ishiba put together a cabinet of 19 ministers aged 51 to 75 years old (12 of them are in their 60s), with the average of 63.6, little changed from the government of Fumio Kishida who stepped aside last month over sluggish approval ratings after serving for three years. Only two of them are women, down by three from the previous administration.

Ishiba installed Katsunobu Kato, 68, as finance minister. He is known to have knowledge of economic and social security policies. Foreign Minister Takeshi Iwaya, 67, is well-versed in security issues, having served as defense minister.

Gen Nakatani, a 66-year-old former Self-Defense Forces officer, has returned to the defense portfolio. He helped enact key security laws in 2015 that enabled Japan to exercise the right to collective self-defense.

Economic Revitalization Minister Ryosei Akazawa, 63, is a close aide to Ishiba. He told reporters on Tuesday that he would like Bank of Japan policymakers “to be cautious about deciding on (rate hikes) until we can confirm that Japan has moved out of deflation completely.” He also urged the central bank to avoid doing anything “that could chill the economy.”

Akazawa appears to have repeated what policy-setters at the Cabinet Office, to which he belongs, have been saying in the government’s monthly economic report: The government and the central bank must “completely overcome deflation and help guide the economy to move on to a new growth-oriented stage.” This shows government officials are still concerned about the downside risk that inflation may fail to be backed by sustained wage hikes.

In his inaugural news conference, Ishiba stressed that the government would “avoid discussing specifics” of what the BOJ should do to achieve 2% price stability with sustained wage hikes. But he also said, “I expect the basic tone of monetary policy to be maintained.”

That seems to be what BOJ policymakers are saying, too. Many of the bank’s board members are urging a cautious approach to normalizing the bank’s policy after years of keeping interest rates near zero, according to the summary of the bank’s Sept. 19-20 meeting.

“Japan’s economy is not in a situation where the bank may fall behind the curve if it does not raise the policy interest rate at a certain pace,” one member said, echoing public remarks by Deputy Governor Shinichi Uchida, a career central banker who was at the core of large-scale monetary easing.

“Therefore, the bank will not raise its policy interest rate when financial and capital markets are unstable.” Last month, the yen appreciated close to ¥140 to the dollar from around ¥147 on expectations of a series of BOJ rate hikes.

Another one agreed: “Since the upside risk to prices reflecting higher import prices has become smaller with the yen’s depreciation being retraced recently, the bank has enough time to assess the situation.”

A different member was more cautious: “The price stability target has not been achieved, and there remain uncertainties regarding economic and financial developments. In this situation, it is undesirable at this point to change the policy interest rate further, which might suggest a shift to full-fledged monetary tightening.”

Looking ahead, another member projected, “It seems that, if economic activity and prices remain on track, the bank can follow a path in which it raises the policy interest rate gradually so that the rate will be 1.0% in the second half of fiscal 2025 (ending March 31, 2026) at the earliest. Therefore, the bank should maintain the current policy interest rate at this meeting.”

At its Sept. 19-20 meeting, the bank’s nine-member board decided in a unanimous vote to maintain the target for the overnight interest rate at 0.25%. The bank’s assessment of the economy was unchanged since its view was expressed in the quarterly Outlook Report issued in July: It has recovered moderately, although some weakness has been seen in part, and that it is likely to keep growing at a pace above its potential growth rate (estimated by the bank to be in the range of
0.5% to 1.0%).

Hit by high costs and labor shortages, Japan’s economy has been struggling, growing just 1.2% in fiscal 2023, below the official forecast of a 1.6% rise after expanding 1.6% in fiscal 2022, which was also under the official projection of 1.7%.

In July, the board decided in a 7 to 2 vote to raise the overnight interest rate target to 0.25% from a range of 0% to 0.1%, citing gradually rising inflation expectations among households and businesses and still high but slightly easing uncertainties for the economy. It also warned of upside risks to its GDP and CPI forecasts, specifically pointing out that the impact of currency market fluctuations on domestic prices is greater than in the past now that more firms are reflecting higher costs in prices and raising wages amid widespread labor shortages.

In March, the board decide in a majority vote to end its seven-year-old yield curve control framework and lift the minus 0.1% overnight interest rate target to a range of zero to 0.1% from minus 0.1%, its first rate hike in 17 years. Many board members believed that the risk of Japan’s economy slipping back into deflation had been reduced and inflation was likely to be led by sustained wage hikes, instead of a spike in import costs.

But the vote on the short-term rate target was 7 to 2. Board member Toyoaki Nakamura, a former Hitachi executive, voted against the rate hike, urging to wait until the bank can confirm smaller firms also have the ability to raise wages. Asahi Noguchi, a former economics professor, also dissented, arguing ending the negative rate and yield curve control at the same time could disrupt financial conditions.