Japan's junior coalition head warns against political meddling in BOJ policy

By Takaya Yamaguchi and Leika Kihara

TOKYO, Feb 16 (Reuters) - Japan's government must avoid meddling in monetary policy and focus on steps to build an economy strong enough to weather the potential pain from any further interest rate hikes, the leader of the ruling coalition's junior partner told Reuters.

Japan must also proceed with a two-year suspension to the 8% sales tax on food at the earliest date possible and consider tapping its huge foreign exchange reserves ?as among sources of revenue, said Hirofumi Yoshimura, who heads the Japan Innovation Party, ?or Ishin, which is a coalition partner of Prime Minister Sanae Takaichi's Liberal Democratic Party. Yoshimura's comments appeared to play?down the view held by some analysts that Takaichi may back down on her pledge to roll out ?the plan sometime during the fiscal year beginning in April.

"As for rate hikes, that's something the BOJ ought to decide. Politicians shouldn't intervene. The ?BOJ would make?a decision?looking at various market environments and through dialogue with markets. I think the government shouldn't meddle ?in detail," Yoshimura said in an interview ?on Sunday, when asked about the possible timing of the next rate hike.

"If the BOJ were to raise interest rates, it might cause some pain such as through (higher) mortgage rates. But when looking at ?the current weak yen, it's possible the central bank could hike. We therefore need ?to create a strong economy, such as by using the budget, so it can cope with the impact," said Yoshimura.

SALES TAX CUT COMING

The remarks suggest the ruling coalition will seek to underpin growth with fiscal policies and avoid applying explicit pressure on the ?Bank of Japan (BOJ) to delay interest rate hikes that could help keep ?unwelcome yen falls at ?bay.

Japan currently applies an 8% consumption tax rate on food and 10% for other goods.

After her party's historic election win on February 8, Takaichi renewed a pledge to suspend by two years the levy on food sales to cushion the blow to households from rising living ?costs - a move that will leave a huge hole in state revenues and worsen Japan's already tattered finances. She said the government will aim ?to roll out the tax suspension by fiscal 2026, after debating details such as the timeframe and funding in a meeting of?ruling and opposition parties.

"It's possible to get this done during the fiscal year 2026. We need to get this done at the earliest date possible," Yoshimura said, reiterating Takaichi's call to seek funding through non-tax revenues as well as cuts to wasteful spending and subsidies.

"Surpluses from Japan's foreign currency reserves are also non-tax revenues, so will likely be considered as one ?option," he said, ?echoing comments made by Finance Minister Satsuki Katayama last week.

Yoshimura's remark heightens the chance the government will tap Japan's $1.4 ?trillion foreign currency reserves, a priority war-chest for future yen interventions, to fund its?tax and spending initiatives?without issuing fresh debt.

MARKETS WATCHING WEAK YEN

Takaichi's landslide election victory has ?heightened market attention to whether she will renew her calls for expansionary fiscal and monetary policies, which she was forced to tone down after a sell-off in the yen and government bonds?late last year driven by market concern over Japan's worsening finances.

The BOJ's decision to raise interest rates to 0.75% in December also got little pushback from Takaichi's administration in a sign of the premier's sensitivity over the yen's declines, which push up import costs and broader inflation. While the yen has rebounded since the election, markets are pricing in the chance of another hike by April.

Yoshimura said it was hard to say whether the weak yen was good or bad for Japan's economy, as it benefits export firms ?but pushes up households' cost of living.

When asked whether authorities should intervene in the currency market to prop up the yen if it were to slide below the psychologically important 160 to the dollar, he said: "It's inappropriate to say what steps should be taken at a certain yen level. But it's important for authorities ?to take appropriate and timely action." The dollar stood at 152.66 yen ?in Asia Monday morning, having gained nearly 3% last week in its largest rise since November 2024.

(Reporting by ?Takaya Yamaguchi and Leika Kihara; editing by Lincoln Feast.)