A former central bank official stated that even if high-profile candidate Saimae Kōshi wins, the Bank of Japan may still raise interest rates in October

The timing of the next interest rate hike by the Bank of Japan may not be delayed due to potential political changes.

According to media reports on September 18, a former senior official of the Bank of Japan stated that even if the pro-monetary easing candidate, Sanae Takaichi, wins the ruling party leadership election and becomes the new Prime Minister, the Bank of Japan may still take tightening action as early as October.

Former Bank of Japan official Tomoyuki Shimoda indicated that if the stock market remains strong and the key "Tankan" business sentiment survey does not deteriorate significantly, the Bank of Japan may raise interest rates at its meeting on October 29-30.

Following the resignation announcement of current Prime Minister Shigeru Ishiba on September 7, the Liberal Democratic Party of Japan is set to hold a presidential election, with the conservative Takaichi, a current member of the House of Representatives, seen as a leading candidate. She is known for opposing interest rate hikes and advocating for fiscal expansion. Influenced by these expectations, some market participants have begun buying yen and Japanese government bonds, betting that the central bank will delay tightening.

Shimoda's remarks highlight that, in the context of Japan's inflation consistently exceeding the 2% target, economic fundamentals may play a more significant role in guiding the central bank's decisions than the policy inclinations of political leaders. This brings a new perspective for global investors focused on Japanese monetary policy and the yen's movements.

Economic Fundamentals are Key

Tomoyuki Shimoda believes that the upcoming results of the Liberal Democratic Party presidential election, including the potential victory of Takaichi, will have limited actual impact on Japan's monetary policy.

He pointed out that "the environment for interest rate hikes is forming," driven by robust corporate profits, wage increases propelled by structural labor shortages, and rising food costs, all of which keep inflation elevated.

According to Shimoda's analysis, whether the Bank of Japan acts in October will hinge on two indicators: the "short-term" business sentiment survey data released on October 1 and the stability of the stock market.

Currently, the Bank of Japan is widely expected to maintain the 0.5% interest rate at the meeting ending this Friday.

Takaichi's Policy Constraints

Takaichi is known for advocating a dual stimulus approach of "Abenomics" in fiscal and monetary policy and has publicly opposed interest rate hikes by the Bank of Japan. However, Shimoda is skeptical about her ability to implement policies that could lead to a weaker yen.

He explained that while a weak yen benefits exports, it raises import costs and exacerbates inflation, which has become a politically sensitive issue domestically. Additionally, if the yen's exchange rate against the dollar falls below 150, it could provoke complaints from the United States.

Currently, Takaichi's main competitor in the party election is LDP member Shinjiro Koizumi, but his views on monetary policy remain unclear. According to the latest Nikkei News poll, their support rates are nearly equal.

Market Divergence and Policy Game

There is a divergence in the market regarding the timing of the Bank of Japan's next actions. A survey shows that most economists expect the Bank of Japan to raise interest rates by another 25 basis points before the end of the year, but opinions vary on whether this will occur in October or January next year The current political uncertainty has increased the likelihood of a delayed interest rate hike. After the new prime minister takes office, regardless of who it is, it is very likely that a loose fiscal stance will be maintained, especially if Kishi Saimi is elected, where the fiscal expansion may be even greater.

For investors, this means that Japan's political transition period will be filled with uncertainty. On one hand, there are expectations of fiscal expansion that may come from the new government, while on the other hand, there is the potential tightening demand from the Bank of Japan based on inflationary pressures. This complex game between fiscal and monetary policies may lead to further upward pressure on Japanese government bond yields