The Bank of Japan (BOJ) is unlikely to implement policy changes abrupt enough to derail ongoing budget discussions, a senior member of the Democratic Party for the People (DPP) suggested on Wednesday. Motohisa Furukawa, the DPP’s tax chief, emphasized in an interview that the central bank’s approach to interest rates remains cautious and considerate of the broader economic and fiscal landscape.
While advocating for a measured response to avoid the risk of deflation, Furukawa expressed confidence that the BOJ would avoid any steps that could interfere with Prime Minister Shigeru Ishiba’s minority government’s ability to negotiate and pass a new budget.
The BOJ has long maintained ultra-loose monetary policies to combat deflation and stimulate economic growth. However, recent speculation about a possible rate hike in December has sparked debate about its timing and implications. Over half of economists surveyed by Bloomberg predict a hike next month, although opposition leader Yuichiro Tamaki has called for delaying such measures until March. Furukawa, however, refrained from committing to a specific timeline, signaling a more flexible stance.
“A rate hike now will hit the private sector, households, and government finances negatively,” Furukawa warned. He added that any hike would likely do little to address the yen’s weakness, one of Japan’s pressing economic challenges. The BOJ, he argued, is unlikely to make hasty moves, given its careful assessment of potential impacts.
Japan’s fiscal and monetary policy considerations are deeply intertwined, especially given the nation’s staggering debt levels. Public debt is projected to reach 251% of GDP this year, while household assets have grown to a record ¥2,212 trillion. This juxtaposition underscores the need for balanced decision-making that supports both growth and financial stability.
Furukawa noted that the government builds an ample buffer into its calculations of debt interest payments to account for potential rate hikes. “The government and the BOJ won’t do anything that would have that impact,” he said, expressing confidence in their coordinated approach.
The Democratic Party for the People, a small yet influential opposition party, has gained significant leverage after its strong performance in October’s national election. By securing 28 seats in the lower house, the DPP now plays a pivotal role in supporting Ishiba’s minority government on legislative matters. This newfound influence has amplified the party’s ability to push its economic agenda.
Central to the DPP’s platform is its proposal to raise Japan’s income-tax-free ceiling. The party aims to increase the threshold from ¥1.03 million to ¥1.78 million, arguing that this move would boost disposable income, encourage labor participation, and combat the deflationary pressures plaguing the economy.
“This is a priority when the economy faces renewed deflationary risks,” Furukawa said, highlighting how persistent inflation has fatigued consumers and prompted some retailers to lower prices.
The proposed tax-free ceiling adjustment has resonated with younger, part-time workers, many of whom limit their annual earnings to avoid crossing the ¥1.03 million threshold that triggers taxation and removes parental tax benefits. The DPP’s proposal has sparked debate about its financial feasibility, with the Finance Ministry estimating it could create a ¥8 trillion ($53 billion) shortfall in tax receipts.
Alternative proposals, including raising the threshold to ¥1.13 million or ¥1.16 million, have surfaced as less costly compromises. However, Furukawa declined to comment on whether these figures might be acceptable to the DPP.
Tamaki, the DPP leader, contends that the overall cost of the full proposal would likely fall between ¥4 trillion and ¥5 trillion. He argues that much of the expense could be offset by increased consumption stemming from higher disposable incomes. Furukawa acknowledged that the DPP has yet to calculate the precise boost to consumption but maintained that the ruling coalition holds primary responsibility for addressing potential tax revenue gaps.
Furukawa highlighted the government’s recent analysis of how an income tax cut worth 1% of nominal GDP, or ¥6.1 trillion, could impact growth and public finances. The report, he said, fails to consider the potential positive effects on labor markets and consumption, leaving the analysis incomplete.
Despite concerns about the country’s debt levels, Furukawa indicated that the DPP remains open to issuing more debt to support economic growth in the short term. Japan’s decades-long struggle with deflation has entrenched a mindset among its citizens that prices and wages are unlikely to rise, he noted. To break this cycle, Furukawa stressed the need for sustainable wage growth that exceeds inflation.
“During 30 years of deflation, there are things that have become ingrained in people’s consciousness,” he said. “We need to make sure that wages continue to rise steadily, exceeding inflation, and we need to make that sustainable.”
The BOJ’s cautious approach to interest rates aligns with the government’s broader fiscal objectives, minimizing potential conflicts during budget discussions. Furukawa dismissed concerns that a rate hike in December would disrupt cooperation between the ruling coalition and the DPP on budgetary matters, stating it is “unthinkable” for the BOJ to act in a way that jeopardizes fiscal stability.
As the government navigates budget talks, the DPP’s influence continues to shape key policy debates. The party’s focus on raising the tax-free income threshold reflects its broader goal of empowering households and stimulating private-sector-led growth, marking a departure from decades of government-driven economic strategies.
