A Call for Calm Financial Policy Amid Political Transitions

We are at a "historic opportunity" to escape from prolonged economic stagnation, according to the government's Basic Policy on Economic and Fiscal Management and Reform. "The Basic Policy indicates a strategy to shift to a growth economy and fully escape deflation with a virtuous cycle of wage hikes and commodity prices" it states. If true, financial policy management must be handled carefully, and with precision, to achieve success. 

Recently the Bank of Japan decided upon additional rate hikes. Volatile stock prices and the sudden appreciation of the yen followed thereafter. Observing these events has once again reaffirmed my belief in the need for caution.

The convergence of a recession in the United States and shifts in financial policies, alongside the Bank of Japan's unexpected rate hikes, has spurred considerable market turmoil. This situation raises concerns regarding the timing and communication of Governor Kazuo Ueda's decisions. Furthermore, it spotlights the complexities of monetary policy in times of transition.

Need for Cautious Comments

At a juncture where precise policy management is essential, the political landscape also requires careful consideration. Prime Minister Fumio Kishida recently announced his decision to abstain from the upcoming Liberal Democratic Party (LDP) leadership election. As a result, there is growing speculation about how the selection of his successor could impact market stability.

Before the Bank of Japan's recent decision to increase interest rates, notable comments from figures such as Toshimitsu Motegi, the Secretary-General of the LDP, appeared to advocate for a rate hike. Making such statements, without thoroughly considering their timing and implications, could be viewed as irresponsibly exerting political pressure. The potential for such tendencies to escalate during the leadership race highlights concerns about their unintended consequences. It also elevates the importance of remaining alert to political risks.

A New US President

The US presidential election also warrants close observation. Former president and Republican candidate Donald Trump, during a press conference, commented in a press conference that, "US presidents should have a say over decisions made by the Federal Reserve (Fed)." His advocacy for more intuitive decision-making is notable. Although he later backed off the suggestion of directly influencing the Fed, he maintained the right to comment on the matter. "I think I have a better instinct than in many cases, people that would be on the Federal Reserve or the chairman."  

Trump has voiced criticism of the current administration over the issue of inflation. However, his own proposals for major tax cuts and high tariffs might also exacerbate inflationary pressures. These policies could hinder monetary easing efforts and complicate the resolution of the strong dollar issue, which he has expressed opposition to.

Reflecting on Trump's previous term, he pressed for substantial monetary easing. In the process, he called Fed Chairman Jerome Powell "clueless" in 2019. He even unfavorably compared him to China's president, Xi Jinping. However, such tactics could lead to severe market turmoil.

Similarly, it's essential to monitor Vice President Kamala Harris, the Democratic candidate. It is important to assess how her positions on economic policy might influence the markets.

Both the US and Japan are undergoing significant economic and political transitions. As such, it is critical to calmly assess how these evolving dynamics converge in the upcoming period.

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(Read the report in Japanese.)

Author: Hideyuki Hasegawa, Deputy Editorial Director, The Sankei Shimbun