Japan's government need not limit candidate selections for openings on the Bank of Japan board to staunch reflationists, Etsuro Honda, an economic adviser to premier Sanae Takaichi, told Reuters in an interview on Thursday. Honda said the economy has exited deflation and that the central bank could find scope to lift interest rates this year as inflation and bond yields point to a normalising economy.
"Japan is out of deflation and faces the challenge of coming up with a growth strategy. It’s in a different phase from Abe’s era when Japan was suffering from deflation. I think Takaichi understands this point," Honda said. Asked who should be selected for the BOJ board, he added: "I don’t necessarily think they need to be reflationists who are proposing powerful monetary easing."
Honda, who previously served as an economic aide to former Prime Minister Shinzo Abe and is known as a long-time associate of both Abe and Takaichi, framed his remarks as consistent with an economy that has moved beyond the prolonged deflationary period targeted by earlier policy. His comments suggest the government may not obstruct a gradual programme of BOJ rate increases - moves that some view as necessary to counter unwanted weakness in the yen.
Premier Takaichi has been identified as an advocate of expansionary fiscal and monetary policy, and she holds the authority to nominate successors when two of the BOJ's nine board members see their terms expire this year. The choice of successors could affect the pace and timing of any future BOJ rate hikes and is being closely watched by markets for insight into the degree to which the premier might influence monetary policy.
The government is set to submit to parliament as early as February 25 a nominee to replace Asahi Noguchi, whose term expires on March 31. Another board member, Junko Nakagawa, will see her term conclude at the end of June. According to parliamentary procedure, nominees must be approved by both chambers of parliament.
While acknowledging the possibility of another rate increase this year, Honda said the BOJ will likely avoid raising rates in March because it needs time to evaluate the impact of its December move. "I can see how rate hikes are needed for price stability," he said, also noting: "If Japan’s economic fundamentals improve, the yen will naturally rise."
Under Governor Kazuo Ueda, the BOJ exited in 2024 the massive stimulus programme deployed by his predecessor as part of Abenomics. Since that exit, the central bank has raised interest rates up to 0.75% on the view that Japan is making progress toward durably hitting its 2% inflation target.
Honda's remarks and the pending board appointments crystallise the tension between continuity and change in Japan's policy mix: the administration's preferences on fiscal and monetary stance, the BOJ's assessment of inflation dynamics, and the timing of further rate adjustments. Market participants continue to monitor nomination timing, the government approval process, and subsequent BOJ decisions as indicators of how policy will evolve.