Former Bank of Japan official: Maintain a cautious stance towards raising interest rates to inject stronger momentum into the economy.

On Wednesday, Yutaka Harada, a former member of the Bank of Japan's policy board, pointed out that while the Bank of Japan is moving towards normalizing monetary policy, it should maintain a cautious stance on raising interest rates, and the government should fully utilize fiscal, monetary, and tax policies to inject stronger momentum into the economy. Harada stated that the government led by current Prime Minister Sanae Takaichi should strive to create a "high-pressure economy" by stimulating demand comprehensively to drive growth. "If the pace of rate hikes is too fast, it could lead to overly tight policy, unnecessarily pressuring the economy." He believes that Japan's current inflation is partly driven by supply-side factors, such as cost-push factors like rising rice prices, and further rate hikes may have limited effectiveness in curbing this type of inflation. The Bank of Japan raised borrowing costs to the highest level in 30 years last week, indicating that they believe the economy is gradually approaching the price stability target. Despite progress towards the inflation target, the government of Koshi City has increased spending recently to seek stronger economic growth, a position that has made some investors uneasy. Harada expressed support for the government's active and "responsible" fiscal policy and predicted that in a high-pressure economy, labor shortages would compel companies to raise wages, thereby improving Japan's overall productivity. However, this economist, known for his stance on reflation, also cautioned that with rising nominal incomes, tax system adjustments, especially tax bracket settings, should be made simultaneously. Harada said, "Many people are paying more taxes, but their actual purchasing power has not really increased." He pointed out that Japan's current income tax system uses a seven-tier progressive tax rate, which can place a heavier burden on taxpayers in an inflationary environment. Currently, the Koshi City government is close to completing the initial budget preparation for the new fiscal year starting in April, having already announced the largest economic stimulus package since the pandemic. Harada recommended that necessary expenses should be concentrated as much as possible in the initial budget, with temporary additional budgets being scaled down to return to their original limited, supplementary role. "The truly necessary expenses should be addressed in the initial budget," he said frankly. "Some of the additional budgets now seem more like 'window dressing'." In addition, Harada also urged the Bank of Japan to keep a certain distance when discussing the issue of the "neutral interest rate." The neutral interest rate refers to the theoretical level of monetary policy that neither stimulates nor restrains the economy. "The neutral interest rate consists of two factors that are difficult to calculate precisely: the natural rate of interest and inflation expectations. It is already difficult to define," he said. "If the Bank of Japan becomes too fixated on the neutral interest rate, it could end up becoming constrained and affect the flexibility of policy decisions."