The year of elections comes to an end as presidents and prime ministers fervently start to action their proposed policies, hoping to plough through the rocky terrains of economic and political uncertainties. Japan finds itself in this very position; can newly elected prime minister Shigeru Ishiba pave the way for economic growth?
The conditions that Ishiba will have to navigate through in his term as prime minister are unique and would have a considerable impact on the policies he will enact. Japan’s current interest rate of 0.25% could mark the beginning of a positive interest rate regime. This is something that Japan has not experienced in a long time, ever since it introduced its historic 0% interest rate in 1999 and negative interest rates in 2016. Looking forward, the Bank of Japan (BoJ) and Ishiba will have to collaborate to ensure interest rates don’t inflict critical damage on the currency markets. Too high of an interest rate could damage export competitiveness, but having the converse could exacerbate inflationary pressures driven by imports.
Under this backdrop, it would become essential for Ishiba to tread cautiously and ensure that policies do not rupture market stability, something that the BoJ (Bank of Japan) is monitoring before implementing any changes in interest rates. Ishiba did propose an increase in capital gains tax, which he recently discarded, sparking negative market reactions and posing the risk that the BoJ may have to delay any interest rate decisions until the markets have cooled down. Despite being short-lived, it exemplifies the important relationship between policies and market volatility, something that Ishiba must consider.
The key objective of negative interest rates was to lift the economy out of a period of deflation and lacklustre economic growth, now known as Japan’s Lost Decade. Indeed, more recently it was the combination of this ultra-lax monetary policy, the Russia-Ukraine war and high imported inflation that pushed price levels upwards. Encouragingly, real wage growth has outpaced price increases by a modest 0.4%, offering some relief to the large elderly population living on fixed incomes.
It would now be Ishiba’s responsibility to ensure the longevity of this real wage growth. Though he has promised to do this by a gradual increase in minimum wages by 42% to 1500 yen per hour, reports estimate that a 1% rise in minimum wage could push the price of services up by 0.07 percentage points. Hence, it would become key to monitor services inflation and control how the rise in minimum wage may augment labour costs.
Most critically, rebuilding public trust in the Liberal Democratic Party (LDP), which Ishiba represents, is a challenge the President must address. Recent scandals suggest involvement of the LDP with the Unification Church and alleged corruption, raising concerns of the reliability and transparency of decision making within the parliament. Although the LDP remains the dominant party, this election marks its weakest performance in years, falling 18 seats short of the majority needed to control parliament, even with the support of its coalition partner, the Komeito party.
Whether Ishiba can revive Japan’s economic growth depends on the prudence that he will exercise in policy making, alongside the ability of his policies to adapt to the multifaceted Japanese economy.
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