* Kishida’s departure will deprive BOJ of counterpart to
work with
* Most candidates to succeed Kishida favour policy
normalisation
* Political uncertainty diminishes chance of Sept or Oct
rate hike
* Reversal of weak-yen trend may raise questions on further
hikes
TOKYO, Aug 16 (Reuters) – The political uncertainty left
by Prime Minister Fumio Kishida’s decision to step down will
likely lead to a pause, rather than a full stop, to the Bank of
Japan’s plan to raise interest rates steadily from near-zero
levels.
How long that pause could be will depend not just on how the
ruling party leadership race plays out, but how market moves
affect the political debate on the preferred pace of rate hikes,
analysts say.
Kishida, who hand-picked Kazuo Ueda as BOJ governor last
year, said on Wednesday he will not stand in his ruling Liberal
Democratic Party’s (LDP) leadership race in September.
The BOJ worked closely with Kishida’s administration in
preaching the benefits of higher wages. Days before the BOJ’s
rate hike in July, Kishida said the central bank’s policy
normalisation would support Japan’s transition to a
growth-driven economy in a sign of his backing towards exiting
ultra-low interest rates.
Kishida’s departure leaves a political vacuum that heightens
uncertainty on economic policy, and complicates the BOJ’s
efforts to steer a smooth exit from easy monetary conditions in
coordination with the government.
Those seen as leading candidates have mostly endorsed
gradual increases in Japan’s current ultra-low interest rates,
partly as a means to keep sharp yen falls at bay.
Shigeru Ishiba, seen as a frontrunner to succeed Kishida as
next LDP leader and thus premier, told Reuters that the BOJ was
“on the right policy track” in hiking rates gradually.
Other leading candidates, such as party heavyweights
Toshimitsu Motegi and Taro Kono, have also called on the need
for higher interest rates and hawkish communication by the BOJ.
The only advocate of aggressive easing is dark horse
candidate Sanae Takaichi, who belongs to a party group that
supported former premier Shinzo Abe’s stimulus policies.
“Takaichi might be an exception, but most candidates don’t
seem to be against the BOJ’s policy normalisation. If so, there
won’t be much disruption to the bank’s long-term rate hike
path,” said veteran BOJ watcher Mari Iwashita.
POLITICS-BOJ TENSION
The BOJ by law is granted independence from government
interference in setting monetary policy. But it has historically
come under political pressure to use its monetary easing tools
to reflate the economy.
That policy tension is in part driven by the government’s
power to appoint BOJ board members including the governor, which
then needs parliament approval to take effect.
With the weak yen intensifying the strain on households
through rising living costs, many politicians will likely nod to
gradual rate hikes for now, analysts say.
That means the BOJ will likely stay the course and keep
raising rates – albeit at a slower pace than initially thought.
A survey taken by think tank Japan Center for Economic
Research on July 30-Aug. 6 showed many economists projecting
another rate hike by year-end.
“The weak yen has been enemy No. 1 for many lawmakers, which
means there is less political pushback against rate hikes than
in the past,” said a source familiar with the BOJ’s thinking.
MOMENT FOR PAUSE
Data showing the economy rebounded in the second quarter on
robust consumption helps justify further rate hikes, analysts
say.
The BOJ has too much to lose by ditching a carefully crafted
plan to roll back a decade-long radical stimulus programme,
which put an end to negative rates in March and led to an
increase in short-term rates to 0.25% from 0-0.1% in July.
The BOJ remains a global outlier on monetary policy. The
central bank kept rates ultra-low even as its U.S. and European
counterparts hiked aggressively since 2022 to combat red-hot
inflation. Now, the BOJ is raising rates while its peers have
begun easing and yet it’s some way off from normalising policy.
Governor Ueda has said further rate hikes are necessary
adjustments of excessive monetary support, rather than a
full-fledged tightening – a stance he is likely to maintain.
But the BOJ also has good reason to ride out the storm by
standing pat at the next policy meeting on Sept. 19-20, which
will likely be close to the date of the LDP leadership race.
The U.S. presidential election may also heighten market
volatility and keep the BOJ from acting at a subsequent rate
review on Oct. 30-31, analysts say.
“The BOJ will hold off on rate hikes at least until
December, when Japanese and U.S. political events run their
course,” said Toru Suehiro, chief economist at Daiwa Securities.
The BOJ would also need time to build trust with the new
prime minister, who may have to wait until November to be
approved by parliament.
An academic turned governor, Ueda has few associates in
political circles, which heightens challenges in communicating
smoothly with the new administration, some analysts say.
There is no guarantee politicians will keep favouring rate
hikes, if the yen’s downtrend reverses course.
A spike in the yen, caused in part by the BOJ’s July rate
hike, led to a plunge in stock prices that forced the central
bank to back-track on its hawkish communication.
“If the weak-yen tide reverses, some politicians may begin
to question whether the BOJ needs to hike rates further,” said
Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan
Stanley Securities.
(Reporting by Leika Kihara
Editing by Shri Navaratnam)
