Explanatory-How would Japan’s ruling party race affect the timing of a BOJ rate hike? By Reuters

By Leica Kihara

TOKYO (Reuters) – Japan’s ruling party leadership race to determine who will become the next prime minister could complicate the central bank’s plan to normalize ultra-loose monetary policy.

Here are some details on how the outcome of the September 27 race could affect the timing and pace of future interest rate hikes by the Bank of Japan (BOJ).

WHO ARE THE FRONTIERS?

Of the nine candidates, three are seen as the front-runners who could make it to the round: former defense minister Shigeru Ishiba, former environment minister Shinjiro Koizumi and Sanae Takaichi, the minister in charge of economic security.

WHAT ARE THEIR OPINIONS ABOUT MONETARY POLICY?

Most of the candidates, including Ishiba and Koizumi, seem to support the idea of ​​gradually increasing interest rates.

Koizumi said he would respect the BOJ’s independence in setting monetary policy. Ishiba said the BOJ was on the “right policy track” by eliminating negative interest rates, although he recently said Japan must prioritize fully exiting deflation.

The most vocal opponent of policy normalization is Takaichi, who said the BOJ raised rates too early and that borrowing costs must be kept low to avoid hurting consumer sentiment.

HOW COULD RACE OUTCOME AFFECT BOJ POLITICS, MARKETS?

The BOJ may be forced to delay the timing of a rate hike if Takaichi becomes prime minister or holds key posts such as finance minister, given her preference for low borrowing costs.

A Takaichi victory could therefore push up bond yields and weaken the yen – an unwelcome prospect for policymakers keen to get markets on board with his plans to exit loose monetary conditions. However, bond yields could rise over the long term if she promises to put together a big spending package that could lead to increased debt issuance.

Takaichi called for “strategic” spending, without giving details. Koizumi also promised emergency payments to small businesses and low-income households hit by rising living costs. None detailed the size of the expenses or how they would be financed. Known as a fiscal hawk, Ishiba sought to put Japan’s fiscal house in order.

HOW WOULD THE POLITICAL CALENDAR AFFECT BOJ POLICY?

The winner of the Liberal Democratic Party (LDP) leadership race is set to become the next prime minister due to the party’s dominance in parliament and is likely to call a snap election that could be held as early as October 27.

The BOJ may prefer to avoid attracting unwanted political attention by raising rates during the election, meaning policymakers may wait until at least December to raise rates again.

The central bank, which held interest rates steady in September, will next hold a policy review on October 30-31, when it will also release new quarterly growth and price estimates.

Most economists polled by Reuters expect the BOJ to raise rates again this year after July’s surprise hike, with more than three-quarters of them betting on a hike at the December 18-19 meeting.