By Leika Kihara
TOKYO, April 1 (Reuters) – Japan may face stagflation risks from the Iran war that would be challenging to deal with using monetary policy, new Bank of Japan board member Toichiro Asada said on Wednesday.
A mix of fiscal and monetary policy tools could help Japan overcome economic challenges, Asada said, though he declined to elaborate about whether the BOJ should continue to raise interest rates.
Surging crude oil prices due to the Middle East conflict are increasing inflationary pressures, though raising rates to deal with the problem could hurt factory output and jobs, he said.
“Japan could be in a stagflationary trend,” Asada said at his inaugural news conference after joining the nine-member board on Wednesday. “It’s hard to deal with such a situation with monetary policy.”
Hand-picked by dovish Prime Minister Sanae Takaichi to succeed Asahi Noguchi, the 71-year-old academic is known as an advocate of expansionary fiscal and monetary policies.
Asada repeated his praise for “Abenomics,” a mix of substantial monetary and fiscal stimulus measures rolled out in 2013 to pull Japan out of a prolonged period of deflation and economic stagnation.
But he said Japan today faces a different situation than when Abenomics was first deployed.
“At the time, Japan was experiencing deflation, so the BOJ could single-handedly focus on keeping monetary policy loose,” he said. “It can no longer do so as Japan now faces inflation.”
Still, Asada said he was OK with being branded as a reflationist, which he defined as someone who is a proponent of taking steps to cause inflation in an effort to pull an economy out of prolonged stagnation.
Asada is joining a board that has shifted in favour of steady rate increases. And the U.S.-Israeli war on Iran has added to mounting inflationary pressures from years of steady wage gains and price increases.
In 2024, the BOJ ended a decade-long stimulus programme that was part of Abenomics. More recently, it has raised rates several times including in December, when it took its short-term policy rate to a 30-year high of 0.75%.
With inflation exceeding the BOJ’s 2% target for nearly four years, Governor Kazuo Ueda has signalled the bank’s readiness to keep raising rates if its economic projections materialise.
When Abenomics was deployed, the BOJ’s radical monetary stimulus was praised by politicians for reversing sharp yen rises that had hurt the export-reliant economy.
Now, a weak yen has become a headache for policymakers by pushing up import costs and inflation more broadly.
When asked about the yen, Asada said currency rates should be set by markets and should not be controlled through monetary policy.
“It’s clear the BOJ is mandated to achieve 2% inflation with an eye on job growth. It doesn’t target exchange rates,” Asada said. “It’s therefore not in a position to judge whether a weak or strong yen would be desirable.”
(Reporting by Leika Kihara; Editing by Andrew Heavens and Thomas Derpinghaus)
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