BOJ should be wary of more rate hikes, adviser to Japan’s likely next PM says

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By Makiko Yamazaki and Yoshifumi Takemoto

TOKYO (Reuters) -The Bank of Japan should be cautious about raising interest rates again as the economy is still fragile, said Etsuro Honda, a close economic adviser to Sanae Takaichi, who is likely to become the country’s next prime minister.

“Japan is at a delicate stage right now, where the long-standing deflationary mindset is gradually giving way to a more positive inflationary outlook,” Etsuro Honda, who advises Takaichi on economic policy, told Reuters in an interview on Thursday.

Pointing to a recent surge in Japanese stock markets that has been partly driven by optimism that Takaichi will promote economic stimulus policies, Honda said her election as the new leader of the ruling party has created positive momentum.

“I genuinely hope they (the BOJ) don’t raise rates now,” he said.

But he emphasised that monetary policy decisions rest with the central bank.

“There’s a growing sense that the timing may be approaching when another rate hike could be tolerated,” he said. “Whether that’s in December or January is still unclear. At the very least, Takaichi appears to be taking a cautious stance.”

Honda, a former special adviser to the cabinet, was an architect of the “Abenomics” stimulus policies that former Prime Minister Shinzo Abe deployed in 2013 – a mix of bold monetary easing, flexible fiscal policy and reform which helped the economy escape more than a decade of deflation but ran up the government’s massive debt.

The ruling party’s pick of Takaichi, a long-time advocate of Abenomics, as its head last week puts her on course to become Japan’s prime minister, which has driven stocks higher and pushed down the yen as investors balance the prospects of more stimulus with higher government debt and pressure on the BOJ to hold off on more rate rises.

Totan Research/ICAP expectations for an end-October BOJ hike have fallen to 27%. Expectations for a hike in December are 44%.

While slower monetary tightening could further weaken the yen, which could in turn accelerate inflation and weigh on consumption, Honda said a moderate decline in the yen is good for the economy when it is in a recovery phase.

“As inflation expectations remain moderate, a sharp depreciation beyond 155 yen to the dollar is unlikely,” he said.

The Japanese currency touched 153 per dollar on Thursday, levels last seen in February. It has fallen more than 3.8% for the week.

(Reporting by Makiko Yamazaki and Yoshifumi Takemoto; Editing by Hugh Lawson and Kim Coghill)