The yen's current weakness benefits the economy and the hit to households from rising import costs can be offset by aggressive fiscal spending, said Takuji Aida, an economist advising the policy circle of Japan's likely new premier Sanae Takaichi.
In an interview with Reuters, Aida brushed off concern that aggressive spending could further weaken the yen, which in turn would push up import costs, potentially accelerate inflation and weigh on consumption.
"We've developed a defeatist mindset, thinking that a weaker yen is bad. That's a major mistake," Aida, chief Japan economist at Credit Agricole, said on Wednesday.
The yen's current depreciation is beneficial, as it coincides with rising stock prices and growing investor confidence in Japan, he said, adding that burdens from rising import costs could be eased by proactive fiscal policy.
The Japanese currency's sharp appreciation after the burst of an asset-inflated bubble prompted companies to cut or shift overseas jobs and investment, Aida said.
"At 140 or 150 yen to the dollar, it becomes viable to manufacture goods domestically. This exchange rate level is helping drive the capital investment cycle upward and also serves as a buffer against U.S. tariffs," said Aida, who advises a group of reflationist-minded ruling party lawmakers.
Takaichi's economic platform strongly reflects the group's policy principles advocating aggressive government spending to revitalize the economy.
On monetary policy, Aida said the BOJ is likely to keep interest rates steady until 2027 after one more hike possibly by early next year.
"Obviously, the BOJ has already set itself on a path toward tightening, so it will likely raise the policy rate to 0.75% by January," he said.
The BOJ will then pause to support the government's spending plans and resume a gradual tightening in 2027, Aida said.
"In 2027, the effects of (Takaichi's) proactive fiscal policy will start to kick in, and we'll see a clear expansion in domestic demand," he said. "Inflation is then likely to pick up in line with domestic demand, prompting the BOJ to begin small, incremental rate hikes."
The BOJ ended a decade-long, massive stimulus last year and raised interest rates to 0.5% in January on the view Japan was on the cusp of durably achieving its 2% inflation target.
Governor Kazuo Ueda has signaled the BOJ's readiness to keep raising interest rates if economic and price developments move in line with its forecasts.
