BOJ Watchers’ Focus on LDP Election Comes Down to One Candidate
(Bloomberg) -- Bank of Japan watchers are keeping a close eye on the leadership election of the nation’s ruling Liberal Democratic Party for potential implications on the monetary policy outlook, with attention focused on a strong advocate of maintaining an easing stance.
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While Japan’s central bank won independence from the government more than a quarter century ago, it has regularly been subject to political pressure in recent decades. The BOJ is currently pursuing a so-called normalization of policy after long holding interest rates near zero, in a reflection of sustained inflation.
The LDP has nine contenders in a leadership race that will effectively determine the nation’s next prime minister, and it’s the fate of Sanae Takaichi that BOJ watchers are monitoring. She’s made clear she would oppose any further rate hikes by Governor Kazuo Ueda, who was tapped for the job by the outgoing prime minister.
“It’s stupid to raise rates now,” Takaichi, who currently serves as economic security minister, said Monday on an online program. “Some say a weak yen is terrible, but the merit of a weak yen is great.”
She also indicated on a separate program a broader opposition to macroeconomic policy tightening. “This is an extremely vital moment. A tax hike, curbing fiscal spending and monetary policy tightening are forbidden steps,” she said.
While Takaichi is one of leading candidates, it’s unclear who will win the race ahead of the party’s vote on Friday. The rest of the contenders haven’t indicated any strong opposition to the BOJ’s policy normalization — indicating little distraction for Ueda if one of them prevails.
“It comes down to whether Takaichi will win,” said Jin Kenzaki, Societe Generale’s head of research for Japan. “That’s the most important point to measure the impact of this election on the BOJ.”
Prime Minister Fumio Kishida is set to step down shortly after the party election, in which he decided not to compete. How well Ueda will work with a new leader is a key factor for the BOJ’s rate path, after Kishida handpicked Ueda for the governor’s position last year and consistently supported him.
According to recent polls by local media, former Environment Minister Shinjiro Koizumi, along with Shigeru Ishiba, who has emphasized the revitalization of regional economies, are among the leading candidates. The two haven’t expressed a clear concern over the handling of policy by the BOJ so far.
Rate Expectations
“Koizumi and Ishiba are probably the favorites,” said Hideo Kumano, executive economist at Dai-Ichi Life Research Institute and a former BOJ official. “If that’s the case, there won’t be a big impact on monetary policy.”
Most BOJ watchers anticipate another rate hike by January next year, with Japan’s inflation hovering at or above the BOJ’s 2% inflation target for more than two years. The BOJ’s benchmark is currently at 0.25%, the lowest among major central banks.
Last week, the BOJ kept policy unchanged, as Ueda signaled he has time to consider another hike. After the central bank raised the benchmark rate for a second time this year and signaled it would keep going in July, it roiled global financial markets, and the Nikkei 225 index tumbled by the most in its history.
With the memories of the market crash vivid, the BOJ has become a delicate topic among most of the LDP contenders — who may be judging it wise not to take the risk of destabilizing markets before the crucial vote.
The vote will be held among rank-and-file party members and LDP lawmakers, with each group getting 368 votes. If the top candidate fails to win a majority of the total votes, there will be a runoff between the top two vote-getters — in which almost all the votes are allocated to lawmakers.
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