By Tamiyuki Kihara and Leika Kihara
TOKYO, July 8 (Reuters) – Japan’s government is considering revising language on monetary policy in its economic blueprint, a draft obtained by Reuters showed, as market fears it is infringing on central bank independence push bond yields to multi-decade highs.
The possible change highlights the balancing act facing Prime Minister Sanae Takaichi, whose dovish stance and preference for aggressive fiscal and monetary support have unsettled investors and intensified scrutiny of her administration’s influence over policy as borrowing costs climb.
Since taking office in October, Takaichi has vowed to boost investment and focus on spending to revitalise the economy. Her administration has also signalled reservations over the Bank of Japan’s interest rate hikes.
In a draft economic blueprint released last month, the government said it was “very important for monetary policy to be guided appropriately to achieve a stronger economy.”
Some analysts said the wording sparked a selloff in Japanese government bonds, fuelling concerns that the government could pressure the BOJ to keep interest rates low and risk falling behind the curve as inflationary pressures build.
In response, the government revised the language to emphasise the importance of the BOJ conducting appropriate monetary policy “to achieve stable inflation” as Japan seeks to strengthen its economy, according to the revised version of the blueprint obtained by Reuters on Tuesday.
The revised blueprint draft, however, retained a key passage urging the central bank to align its policy decisions with the government’s economic agenda.
Several domestic media outlets had earlier reported that the language could be revised.
The news failed to prevent the benchmark 10-year yield from hitting a 30-year high of 2.865% on Wednesday.
“Investors’ distrust over Takaichi’s policy stance and its communication with markets runs deep and can’t be fixed with such minor tweak in wording,” said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.
“Bond markets won’t stabilise unless the fiscal and monetary language of the blueprint is completely rewritten,” he said, projecting the 10-year yield to hit 3% in coming months.
FISCAL CONCERN LOOMS
The new draft was submitted to a meeting of ruling coalition lawmakers on Tuesday. A final version of the blueprint, which will be the first since Takaichi took office, will be released after cabinet approval later this month.
Japan’s law grants the central bank independence from political interference, but it also requires close coordination with the government’s economic policy.
Citing that coordination mandate, the Takaichi administration and its reflationist advisers have urged the BOJ to proceed cautiously with further rate hikes.
However, inflation has hovered around the BOJ’s 2% target for four years, underpinned by rising import costs from the yen’s persistent weakness and steady wage growth, reinforcing the BOJ’s argument for lifting still-low borrowing costs.
The BOJ raised interest rates twice since Takaichi took office, including in June when it took its key policy rate to a 31-year high of 1%, and has made clear it stands ready to tighten further to prevent inflation from getting out of hand.
Underscoring the bank’s vigilance on price pressures, even dovish board member Toichiro Asada said “relatively rapid” pass-through of higher costs warranted close attention.
Investors also sold bonds on signs of Japan’s receding commitment to get its fiscal house in order with the draft blueprint removing language on the need for “fiscal health.”
“The recent fast-pace rise in 10-year yields reflect Japan’s wavering stance on fiscal discipline. Seeking the BOJ’s help to curb yield rises would backfire,” said Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute.
(Reporting by Tamiyuki Kihara and Leika Kihara; additional reporting by Yoshifumi Takemoto; Editing by Christopher Cushing and Shri Navaratnam)
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