TOKYO, Sept 18 (Askume) – Japan’s ruling party leadership race will determine who will be the next prime minister, potentially complicating the central bank’s plan to normalise ultra-easy monetary policy.
Here are some details on how the outcome of the race on September 27 could affect the timing and pace of future interest rate hikes by the Bank of Japan (BOJ).
Who are the main candidates?
Of the nine candidates, three are considered frontrunners to advance to the second round: former Defense Minister Shigeru Ishiba, former Environment Minister Shinjiro Koizumi and Takaichi Sanae, the minister in charge of economic security.
What is his view on monetary policy?
Most candidates, including Ishiba and Koizumi, appear to support the idea of gradually raising interest rates.
Koizumi said he would respect the Bank of Japan’s independence in setting monetary policy. Ishiba has said the Bank of Japan is on the “right policy path” by eliminating negative interest rates , though he addedIt recently said Japan should prioritize fully exiting deflation.
The strongest opponent of policy normalization is Takaichi , who said the Bank of Japan is raising interest rates too quickly and that borrowing costs should be kept low to avoid hurting consumer confidence.
What impact will the election results have on Bank of Japan policy and the markets?
If Takaichi becomes prime minister, or takes on an important position such as finance minister, because his priority is to reduce borrowing costs, the Bank of Japan may be forced to delay raising interest rates.
As a result, a market victory could push bond yields lower and weaken the yen – an unappealing prospect for policymakers seeking to keep the market in step with their plans to exit easy monetary conditions. However, if she pledges to roll out a massive spending plan, this could lead to an increase in debt issuance and push up bond yields in the long term.
The High Market called for “strategic” spending but gave no details. Koizumi also promised to provide emergency support to small businesses and low-income families affected by the rising cost of living. Neither of them gave details of the size of the spending or how it would be financed. Shigeru Ishiba, known as a fiscal hawk, called on Japan’s fiscal officials to maintain order.
How will the political calendar affect Bank of Japan policy?
With the Liberal Democratic Party dominating parliament and the winner of the LDP leadership race becoming the next prime minister, the party is likely to hold early elections, possibly as early as October 27.
The Bank of Japan wants to avoid raising rates around election time to avoid attracting unnecessary political attention, meaning policymakers may have to wait until at least December before raising rates again.
Following its Sept. 19-20 meeting, the Bank of Japan will hold a policy review on Oct. 30-31, when it will also release new quarterly growth and price forecasts.
Most economists polled by Askume expect the BOJ to raise interest rates again this year, with more than three-quarters predicting a rate hike at the Dec. 18-19 meeting.
