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the bank of japan is facing potential political pressure to continue raising interest rates.

on friday, september 27, japan will hold a liberal democratic party (ldp) leadership election, and the winner will become japan's next prime minister. japanese media reported that according to a survey of voting trends among japanese parliamentarians and ldp members and party friends, sanae takaichi is one of the three main candidates and may become japan's first female prime minister.

as an advocate of "abenomics", sanae takaichi advocates no more interest rate hikes. if she is elected, it may put pressure on the bank of japan to slow down its pace of interest rate hikes.

political uncertainty has complicated the bank of japan's rate hikes, while the central bank's hawkish stance has weakened as the risk of a u.s. recession increases and global financial markets are volatile.

sanae takaichi: advocate of “abenomics”

the bank of japan launched an aggressive stimulus package in 2013 under pressure from then-prime minister shinzo abe, which morphed into a complex policy mix aimed at pushing weak inflation toward its 2% target.

the boj ended that policy mix in march as rising raw material costs and a tight job market pushed up inflation and wages. in july, the boj, led by governor kazuo ueda, raised interest rates to 0.25%.

sanae takaichi, 63, currently serves as minister of economic security. she is one of the advocates of the "abenomics" stimulus policy and the only candidate who has explicitly opposed further interest rate hikes.

on september 23, sanae takaichi said in a live broadcast that "raising interest rates now is stupid" and warned that doing so could push japan into deflation again. on the 19th, sanae takaichi said in an interview:

"what we are seeing now is cost-push inflation. until real wages turn positive and stabilize, we must keep monetary policy accommodative."

takaichi's economic plan has support from some lawmakers and academics, such as etsuro honda, a former abe economic adviser, who have played a major role in abenomics and support reflation, an attempt to raise prices to counter deflationary pressures.

a resurgence in inflation since abe's assassination in 2022 has pushed talk of reflation into the background, but massive spending and ultra-low interest rates remain popular among supporters of the conservative liberal democratic party. in addition, many citizens are unhappy with the bank of japan's policies, which many blame for a decade of economic stagnation that began in the late 1990s on premature tightening.

bank of japan's rate hikes may be hampered

sanae takaichi's dovish comments have caused the market to worry that if she takes office, the bank of japan's interest rate hikes may be hindered. naomi murama, chief bond strategist at mitsubishi ufj morgan stanley, said:

"if takaichi sanae wins, the initial market reaction will likely be a fall in the yen as the market factors in that future rate hikes by the bank of japan may be delayed."

even if sanae takaichi fails to become prime minister, analysts believe her strong performance in the campaign could still help her secure a key cabinet post and put some pressure on the next prime minister.

murama also noted that it is not certain that the other leading candidates will support further rate hikes. shigeru ishiba, who has criticized the bank of japan's negative interest rate policy, recently told reuters that it is crucial to completely get rid of deflation. so while a victory for sanae takaichi would be the worst-case scenario for the bank of japan, other candidates could also raise objections to the bank of japan's rate hike plans at a time when the japanese economy is facing headwinds such as a soaring yen and weak global demand. murama said:

“many candidates appear to support rate hikes as it would help slow yen depreciation and inflation. however, that could change if japan’s economy weakens and growth slows.”

some analysts believe that the departure of current prime minister fumio kishida is a blow to the bank of japan, as kishida appointed kazuo ueda as the central bank governor and supported the bank of japan's gradual tightening of monetary policy. nomura research institute economist and bank of japan director norihide kiuchi said:

“no matter who wins the ldp election, the situation for the boj will not be better than when fumio kishida was prime minister. if sanae takaichi wins, it will be difficult for the boj to raise interest rates.”

ueda kazuo said at a news conference on tuesday that japan "must avoid returning to deflation," adding:

“whoever becomes the new ldp leader, whatever his or her beliefs, we hope to communicate closely with the new government.”

ueda reiterated the bank of japan's stance that it will raise interest rates again if data supports it, but will not rush to do so. some analysts believe that his remarks indicate that the bank of japan is unlikely to take policy action at its meeting next month.