The Bank of Japan’s Double Jeopardy

With the recent news of the collapsing Japanese Yen and Prime Minister Takaichi and the US’s plan to address the issue, it made me ponder where the Bank of Japan was during all of this. Upon a further look into the economic policies of Takaichi, I believe Takaichi’s policies will eventually leave the Bank of Japan in a double jeopardy in balancing either the Yen, or subjecting the aging population of Japan to lose their purchasing power.

Takaichi’s Plan

My focus was Takaichi’s food tax cuts. Her tax cuts were aimed to increase consumption in the economy for all households, which is a noble goal. However, there are two key issues with this —

1. Japan’s national debt is one of the worst in the developed countries. Its Debt to GDP ratio clocks in at a staggering 248% (https://tradingeconomics.com/japan/government-debt-to-gdp) because of its flat economic growth in the past three decades. Cutting taxes only furthers this issue, especially since Takaichi offers no alternative for the lost money in government income.

2. A food tax cut will inevitably reel in further issues to social security. As aforementioned, Takaichi has offered no plans to fill the gap of the food tax cut, which could impact government spending, especially on social security, which is especially important in an aging population like Japan’s, meaning that they are more vulnerable to it.

Monetary Policy

To address these issues incoming, alongside the yen value falling, the Bank of Japan is stuck between a rock and a hard place. The BOJ could raise interest rates, which addresses the issue of the Yen sliding in value. But simultaneously, this would further hurt the deficit that Japan is perpetuating itself in, eventually inching it closer to the doomsday clock. Or the BOJ could hold interest rates but eventually let the value of the yen still spiral. The bottom line is that Takaichi’s policies are making it difficult for the BOJ to be able to operate in this environment.

To me, it’s reflective of the condition of the economic policy world we live in, where in democratic countries, we see a shifting of politics towards the short-term boosts against the more sustainable the long-term growth. In my next article, I will explore the connection between the two in context of the trade between the US and Japan.

Thank you for reading this article, and please leave any feedback as this is my first time ever writing a piece like this.