Japan shifting to wage-driven inflation phase, finance minister says

TOKYO: Japan's economy is seeing price rises driven by higher import costs and on the cusp of shifting to a period of sustained inflation driven by rising wages, Finance Minister Satsuki Katayama said on Wednesday (Oct 21).

The government's scheduled consumption tax cut and payouts are aimed at cushioning the blow to households from rising living costs, Katayama told parliament.

"We are exchanging views with the Bank of Japan on various fronts. I see no gap between the view of the government and that of the BOJ," Katayama said when asked by a lawmaker whether the government's tax cut plan could conflict with the central bank's efforts to combat inflation with interest rate hikes.

The BOJ raised interest rates to a 31-year high of 1.25 per cent in September, as the Iran war-induced energy shock, strong global AI demand and higher import costs from a weak yen heighten the risk of underlying inflation overshooting its 2 per cent target.

Prime Minister Sanae Takaichi's administration plans to cut by two years an 8 per cent consumption tax rate on food items from April next year. Analysts warn the tax cut and the administration's big spending plans could boost demand and contradict the BOJ's efforts to rein in inflation.

Katayama said it was true that tax cuts generally work to push up inflation by stimulating demand.

"But we will ensure that our responsible and proactive fiscal policy boosts Japan's supply capacity in a way that does not accelerate inflation," she said.