Open Stackelberg Warfare in Japan

I have previously noted tension between the Bank of Japan and Abe Shinzo’s governing coalition regarding the timing of the next round of interest rate hikes. It seems that that tension has become open warfare between monetary authorities and LDP and government officials in advance of this week’s meeting of the BOJ’s Policy Board.

As this article in the English language edition of the Asahi Shimbun reports, BOJ officials have been encouraged by recent positive signs in the economy and are likely to opt for a hike this week, notwithstanding a muted warning from the prime minister and more open criticism from LDP Secretary-General Nakagawa Hidenao.

I have a hard time imagining what the government stands to gain from an open campaign against a rate hike. Protecting itself from potential negative consequences of a rate hike (i.e., having “we told you so” soundbites ready in advance)?

I still think that BOJ President Fukui has an itchy trigger finger as far as interest rates are concerned, because Japan’s economic recovery has yet to spread from industries to households (indeed, a major concern now, as David Pilling wrote here in the FT, is that income inequality has grown substantially even as the economy has supposedly emerged from the doldrums). So the government and the LDP may be right that a rate hike is probably premature, but too much public criticism of the BOJ’s handling of monetary policy risks undermining market confidence in Japan’s economic authorities and highlighting the vacuum in economic policymaking under the Abe Cabinet.

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