The leader of a junior party in Japan's ruling coalition stated in an interview with Reuters that the government must refrain from intervening in monetary policy and should instead concentrate on building a sufficiently robust economy capable of withstanding potential shocks from future interest rate hikes.

Yoshifumi Yoshimura, head of the Japan Innovation Party (Osaka Ishin no Kai), also emphasized that Japan should swiftly implement a planned two-year suspension of the 8% consumption tax on food and consider utilizing the nation's substantial foreign exchange reserves as a source of fiscal revenue. His party is a coalition partner of the Liberal Democratic Party, to which Prime Minister Takaichi Sanae belongs. Yoshimura's comments appear to downplay the views of some analysts who speculate that Prime Minister Takaichi might abandon her commitment to implementing related plans in the new fiscal year starting in April.

When questioned about the potential timing of the next rate hike during a Sunday interview, Yoshimura stated, "The decision on interest rate hikes should be left to the Bank of Japan; politicians should not interfere. The central bank will make its decision after considering various market conditions and communicating with the market. I believe the government should avoid excessive intervention in the details."

"If the Bank of Japan raises rates, it may cause some temporary pain, such as higher mortgage rates, but given the current weak yen, a rate hike is a possibility. Therefore, we need to build a strong economy through measures like the budget to cope with the impact of any rate increases," Yoshimura added.

The comments suggest the ruling coalition intends to support economic growth through fiscal policy, avoiding explicit pressure on the Bank of Japan to delay rate hikes—which could help curb disorderly yen depreciation. Japan currently applies an 8% consumption tax to food and a 10% rate to other goods.

Following her party's historic election victory in the week of February 8th, Prime Minister Takaichi reaffirmed her pledge to suspend the food tax for two years to alleviate the impact of rising living costs on households. This measure would create a significant fiscal shortfall, further straining Japan's already fragile finances. She indicated the government aims to implement the tax cut in the 2026 fiscal year, following discussions with ruling and opposition parties on specifics such as timing and funding sources.

"Completing this by fiscal 2026 is feasible, and we must implement it as soon as possible," Yoshimura said, echoing Takaichi's stance and proposing funding through non-tax revenues, cuts to inefficient spending, and subsidies.

"Surpluses from Japan's foreign exchange reserves also count as non-tax revenue, so they will likely be considered as one option," he noted, aligning his remarks with those of Finance Minister Tsukasa Akimoto last week.

Yoshimura's statements increase the possibility of the government utilizing part of its $1.4 trillion foreign exchange reserves—traditionally a key reserve for future currency market intervention—to fund fiscal measures without issuing new government bonds.

Prime Minister Takaichi's significant election victory has heightened market focus on whether she might revive her expansionary fiscal and monetary policy stance. Late last year, she was forced to temper such rhetoric after market concerns over Japan's deteriorating fiscal health triggered a sharp decline in the yen and government bonds.

The Bank of Japan raised interest rates to 0.75% in December, a move met with little opposition from the Takaichi administration, signaling the Prime Minister's acute sensitivity to yen weakness—which increases import costs and overall inflation. Although the yen has rebounded somewhat after the election, markets still anticipate a potential further rate hike before April.

Yoshimura remarked that it is difficult to judge the overall impact of a weak yen on Japan's economy, noting that while it benefits export-oriented companies, it raises living costs for citizens.

When asked whether authorities would intervene to support the yen if it weakened past the key psychological level of 160 yen per dollar, he stated, "It is not appropriate to predetermine actions at specific exchange rate levels, but it is crucial for authorities to take timely and appropriate measures." In early Asian trading on Monday, the dollar traded at 152.66 yen, following a nearly 3% gain last week—its largest weekly increase since November 2024.