Former International Monetary Fund chief economist Kenneth Rogoff has urged Japan to respect central bank independence, warning against unwelcome rises in bond yields. At a March 26 economic council meeting, Rogoff advised Prime Minister Sanae Takaichi that an autonomous central bank is crucial for market trust, especially amidst rising global debt-funded spending. He cautioned long-term Japanese government bond (JGB) yields could escalate to 3% or higher, stressing independence is paramount when markets fear policies pushing up interest rates, as a perceived subordinate central bank can exacerbate yield increases.
Rogoff also suggested establishing an independent institution for fiscal projections would bolster confidence. This comes as Prime Minister Takaichi, advocating loose fiscal and monetary policies, and her advisers have opposed the Bank of Japan’s (BOJ) plans to raise interest rates. The BOJ, Japan’s central bank responsible for monetary policy, has signalled readiness to hike rates soon, though political opposition and global conflicts could prompt delay.
Takaichi’s administration has introduced fuel subsidies and considers freezing an 8% sales tax on food for two years, measures expected to expand Japan’s significant debt. The government also contemplates changes to fiscal goals, which critics say dilute deadlines for a primary balance surplus. Concerns over these expansionary fiscal policies and mounting inflationary pressures recently pushed the benchmark 10-year JGB yield to a 27-year high of 2.43%.
Olivier Blanchard, professor emeritus at MIT, also advised against a temporary tax freeze, advocating structural reforms. He warned Japan’s decreasing debt ratio, currently benefiting from low rates, is unsustainable. Blanchard highlighted that debt issued at very low rates is unlikely to persist as global neutral rates climb, advising Japan to aim for a zero primary balance within approximately five years.
