Japan Institute for National Fundamentals
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Speaking out

Hideo Tamura

【#1403】BOJ Should Not Disrupt Takaichi’s Growth Strategy

Hideo Tamura ／ 2026.09.24 (Thu)


September 24, 2026

　
At its monetary policy meeting on September 18, the Bank of Japan decided to raise its policy interest rate by 0.25 percentage points to 1.25%, effective on September 24. The policy interest rate was thus increased to the highest level in 31 years, since 1995 just before Japan plunged into a chronic deflationary recession. BOJ Governor Kazuo Ueda has hinted at the possibility of consecutive and significant rate hikes in the period ahead. But the central bank should not stop the momentum of　Japan’s economic revitalization led by the Sanae Takaichi administration.

Interest rate hikes cool domestic demand

One thing that cannot be overlooked in regard to the BOJ’s interest rate hike is pressure from the United States. At a press conference following a meeting of Group of 20 finance ministers and central bank governors in the U.S. in early September, U.S. Treasury Secretary Scott Bessent made a remark urging Japan to halt its reflationary policy. Prompted by the remark, leading Japanese media outlets quickly reported that the BOJ was certain to raise the policy interest rate. At the monetary policy meeting, most of the BOJ policy board members agreed to the rate hike.

If the BOJ, which should base its rate-hike decisions on domestic economic conditions, is overly susceptible to Washington’s wishes, foreign investment funds may decide whether to buy or sell yen or Japanese government bonds based on statements by senior U.S. government officials and U.S. financial market trends. On the foreign exchange market where speculative yen selling had begun to subside, in fact, the yen’s depreciation was suspended after the BOJ rate-hike decision.

At his press conference, BOJ Governor Ueda denied pressure from the U.S. and repeatedly emphasized that the momentum of corporate goods price hikes indicated that consumer prices could rise beyond the BOJ’s 2% price stabilization target. However, this explanation is unconvincing. Currently, the consumer price inflation rate is below 2%, with sharp price increases limited to food and energy products affected by higher costs associated with the turmoil in the Strait of Hormuz and other conflicts.

In this case, the appropriate way to address inflation would be through government energy subsidies and a cut in the consumption tax on food products. Amid weak domestic consumer demand, interest rate hikes would significantly boost mortgage costs for working households and borrowing costs for small, medium-sized, and micro enterprises.

PM should have dialogue with BOJ governor

True to its commitment to “responsible and proactive fiscal policy,” the Takaichi administration has shown moderation in fiscal spending. The planned injection of fiscal funds into 17 strategic areas, including artificial intelligence, is expected to drive domestic investment and serve as a catalyst for private-sector investment. Yet private-sector investment, which is what ultimately matters, will depend on expectations for future domestic demand.

A review of the revised budget for fiscal 2026 and budget requests for fiscal 2027 shows that part of significant increases in tax revenue will be used for redeeming government debt. This reflects an intention to restrain policy spending increase and additional government bond issuance. While this would help stabilize the government bond market, it could also put pressure on domestic demand to the extent that the increase in tax revenues is not sufficiently returned to the private sector. If the BOJ rushes into additional rate hikes under such circumstances, the Takaichi administration’s growth strategy may be disrupted. Takaichi should hurry dialogue with Governor Ueda.

Hideo Tamura is a Planning Committee member at the Japan Institute for National Fundamentals and a columnist for the Sankei Shimbun newspaper.