Japan Should Keep Rates, Prices Moving, Prime Minister Hopeful Kato Says

(Bloomberg) — Japan should continue to aim for a world where interest rates and prices keep moving, according to Katsunobu Kato, a potential candidate for the country’s next prime minister.

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“It’s clear that we have to head in this direction” where prices and rates aren’t stagnant, Kato told Bloomberg in an interview Tuesday, when asked whether Japan’s at a stage of raising rates further. Although caution is still needed for the immediate future given the market turmoil this month, Kato also said years of unmoving prices and rates had been damaging.

“That lack of movement created structural distortions,” said Kato. “We’re finally getting to a stage where rates can keep moving.”

Kato’s comments come as he aims to run for the ruling Liberal Democratic Party’s leadership election next month to replace Prime Minister Fumio Kishida. The former health minister is a dark horse but also the type of person who could emerge as a compromise candidate, given his track record of not ruffling a lot of feathers in the ruling party, while playing key roles under the last three premiers.

Kato will need to secure 20 backers among his fellow lawmakers to make an official run for the top job, but he said he’s still in the process of securing enough endorsements. He has yet to make a formal declaration of his candidacy.

Speaking on monetary policy, Kato said that further interest rate hikes are something Japan should aim for in the future, although it’s important the Bank of Japan proceeds cautiously.

“The Japanese economy is not yet fully healthy, so stakeholders including the BOJ need to take a careful approach,” he said.

The BOJ raised interest rates again in July, following its first hike in 17 years in March. Governor Kazuo Ueda didn’t rule out the possibility of another rate increase by the end of the year depending on future data, a stance which partly contributed to global market chaos this month.

Given the potential for additional rate hikes from the BOJ, how to manage fiscal policy will be a point that will have to be addressed in the upcoming leadership election. Japan carries the heaviest public debt burden among developed nations, with the amount expected to reach ¥1,105 trillion at the end of this fiscal year, equivalent to more than 250% of gross domestic product, according to the International Monetary Fund.

Kato, who also previously worked at the Ministry of Finance before entering politics, advocated for a balanced approach to managing fiscal health and seeking growth.

The leadership hopeful said his main policy focus was achieving sustainable economic growth. “Real wages must rise not just for one month, but over two or three years,” he said. Real wages for Japanese workers turned positive for the first time in 27 months in June, after pay negotiations across a variety of employers led to increases in wages.

As part of his growth strategy, Kato called for major investments to boost productivity, especially given Japan’s increasingly severe labor shortages. Kato used to push for reforms in work practices and was also health secretary during the early months of the pandemic, after which he became Japan’s chief spokesperson.