Sinking in polls, Japanese leader renews unorthodox inflation bet

Japanese leader Fumio Kishida has seen his approval rating plummet of late along with the yen. But he’s sticking with his world-defying bet on loose monetary policy even as voter dissatisfaction grows.

Support for Kishida’s year-old cabinet has slumped to below 30%, roughly half of what it was six months ago, mostly due to a public uproar over his ruling party’s links with a fringe church that were exposed after the July murder of Shinzo Abe, Japan’s longest-serving prime minister. Kishida announced a probe into the organization this week in a bid to quash the scandal. 

At the same time, voters are becoming increasingly unhappy about higher prices fueled by the yen, which this month weakened to the lowest level against the dollar since 1990. September figures due Friday are expected to show Japan’s key inflation gauge hitting 3%, the highest in about 30 years after factoring out tax distortions. 

Still, Kishida isn’t budging. On Tuesday, he reiterated his backing for BOJ Governor Haruhiko Kuroda’s inflation-sparking stimulus.

“Foreign exchange rates are determined by various factors,” Kishida said in parliament. “Monetary policy should be decided by the comprehensive assessment of various factors, not only the exchange rate but also the economy, inflation and its impact on small companies.” 

British Prime Minister Liz Truss just provided a stark lesson in the risks of abruptly shifting direction in jittery markets. Any move by Kishida to criticize Bank of Japan policy or pressure the central bank to raise rates could cause even more havoc for bonds and stocks. 

“Kishida is better to sticking with what he’s already doing patiently,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management. “Reversing course, especially on monetary policy would send a shock wave through financial markets and ruin all the positives of easing such as the record corporate profits that are the source of any wage growth.”

As the government hands out subsidies, opposition parties have struggled to capitalize on his woes. As has been the case for years, none of them boast support of more than single figures. 

While Kishida doesn’t need to face a national vote for three years and the opposition is weak, a challenge to his leadership could still come from within his ruling Liberal Democratic Party if prices keep rising. It wouldn’t be surprising if inflation accelerated further to 5%, according to Rie Nishihara, chief Japan equity strategist at JPMorgan Securities Japan Co Ltd.

“That would chill everyone’s finances -- hit them in the pocketbook,” she said. “So he should carefully review how far fine-tuning interest rates would hurt households and small and medium-sized enterprises.”

Kishida is set to ramp up spending again with a stimulus package later this month and another extra budget that provides more relief for struggling households and businesses. That gives him another chance to boost his public support while showing he’s a steady hand at the wheel. 

Although Japan’s inflation is well below levels in the US and UK, even a 3% reading will likely dismay a public whose perception has been shaped by years of falling prices and stagnant incomes. 

Kishida has promised to unveil a new mechanism for slowing the rise in power bills in addition to already extended subsidies keeping a lid on gasoline prices and feed costs for farmers. He also plans to introduce measures that would generate wage growth matching the pace of inflation, as real wages adjusted for inflation have fallen for five straight months. 

“In terms of underlying inflation, I think there’s no urgency for the BOJ to raise interest rates compared to the US and Europe,” said former BOJ board member Sayuri Shirai, now a professor at Keio University. “If inflation goes to 4% or 5%, maybe they will think about it.”

Kuroda has repeatedly said the bank must keep interest rates low to support a fragile, slow economic recovery, arguing the current inflation -- largely driven by energy and food -- isn’t sustainable without robust wage gains.