By Yoshifumi Takemoto
TOKYO, Feb 13 (Reuters) - Japan's government does not necessarily need to pick reflationists to fill seats opening up in the central bank board as the economy has exited deflation, Etsuro Honda, an economic adviser to premier Sanae Takaichi, told Reuters.
The Bank of Japan may see scope to raise interest rates this year as rising inflation and bond yields suggest the economy is normalising, said Honda, who was also an economic aide of former Prime Minister Shinzo Abe.
"Japan is
out of deflation and faces the challenge of coming up with a growth strategy. It's in a different phase from Abe's era when Japan was suffering from deflation. I think Takaichi understands this point," Honda said in an interview on Thursday.
"I don't necessarily think they need to be reflationists who are proposing powerful monetary easing," Honda said, when asked who should be chosen as new BOJ board members.
The comments by Honda, known as a long-time associate of Abe and Takaichi, suggest the administration may not necessarily get in the way of gradual BOJ rate hikes, seen as needed to keep unwelcome yen falls at bay.
Known as an advocate of expansionary fiscal and monetary policy, Takaichi has authority to pick successors when two of the BOJ's nine board members see their terms expire this year.
The choice may influence the pace and timing of the BOJ's future rate hikes, and is closely watched by markets for clues on the extent to which Takaichi may meddle in monetary policy.
Sources have told Reuters the government is set to submit to parliament as early as February 25 a nominee to replace Asahi Noguchi, whose term ends on March 31. Another board member, Junko Nakagawa, will also see her term expire at the end of June. Nominees must be approved by both chambers of parliament.
While acknowledging the chance of another rate hike this year, Honda said the BOJ will likely avoid raising rates in March as it needs to scrutinise the impact of its hike in December.
"I can see how rate hikes are needed for price stability," Honda said. "If Japan's economic fundamentals improve, the yen will naturally rise," he added.
Takaichi had said she will carry over the policies of Abe, who deployed the "Abenomics" stimulus policies aimed at pulling Japan out of prolonged deflation and economic stagnation.
Under Governor Kazuo Ueda, the BOJ exited in 2024 the massive stimulus programme deployed by his predecessor as part of Abenomics. It has since then raised interest rates up to 0.75% on the view Japan was making progress in durably hitting its 2% inflation target.
(Reporting by Yoshifumi Takemoto, writing by Leika Kihara; Editing by Sam Holmes)
