October 20, 2014 / 8:21 AM / 5 years ago

Japan ruling coalition ally seeks fresh stimulus to deal with weak yen

TOKYO (Reuters) - The junior partner in Japanese Prime Minister Shinzo Abe’s coalition government called on Monday for fresh steps to stimulate the sputtering economy and to soften the pain of rising costs caused by the weak yen.

A picture illustration shows Japanese 10,000 yen notes featuring a portrait of Yukichi Fukuzawa, the founding father of modern Japan, taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao

Keiichi Ishii, policy chief of the Komeito party, said the government needs to craft an extra budget given the economy’s weakness, regardless of Abe’s decision on whether to go ahead with a second sales tax hike in 2015 following one in April.

“Negative factors are emerging in the economy such as higher electricity bills and rising prices of imported goods,” Ishii told Reuters in an interview, referring to the impact of the weak yen, which hit a six year-low against the dollar this month.

“If Abe decides to raise the sales tax, there’s no doubt that he would compile an extra budget (to offset the expected blow to the economy), but apart from the decision, an extra budget is necessary given the current economic situation.”

The resignation of two cabinet ministers on Monday could complicate the tough decision on the sales tax, but Ishii said the two issues are “totally unrelated” and that Abe is due to make a decision by examining the economy at the time.

Ishii said hurdles were not getting higher for the planned tax rise to 10 percent next year, but added the economy has been “disappointing” since April’s tax hike to 8 percent from 5 percent. The move triggered the deepest quarterly economic slump since the 2009 global financial crisis.

Ishii shrugged off some calls within Abe’s Liberal Democratic Party for correcting the Bank of Japan’s massive monetary stimulus, which they blame for driving the yen down.

“The current exchange market and economic situation reflect diverging monetary policies between Japan, the U.S. and Europe. We should not try to control it artificially, although steps are needed to deal with harmful effects of a weak yen,” Ishii said.

The government should take fiscal measures to help people in agriculture, small firms and cold rural areas, who suffer from higher fuel costs due to the weak yen, he said, adding that it is expected to steer clear of currency manipulation.

“The BOJ has agreed with the government to steer monetary policy aiming for conquering deflation and achieving a 2 percent inflation target. We should not criticize the BOJ for acting on that commitment.”

Asked whether fresh monetary stimulus would be needed to meet the price goal, which investors see as a tall order, Ishii said monetary policy should be left up to the BOJ to decide.

The BOJ has left policy unchanged since it announced an intense burst of monetary stimulus in April 2013, pledging to hit 2 percent inflation in roughly two years via aggressive asset purchases.

While the bank is in no mood to ease policy again anytime soon, annual core inflation - which excludes the effects of a sales tax hike in April - eased to 1.1 percent in August from 1.3 percent in July.

Editing by Chris Gallagher & Kim Coghill

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