Sanae Takaichi's likely ascension to Japan's Prime Minister, advocating for expansionist fiscal and loose monetary policies, has significantly reduced the probability of a Bank of Japan interest rate hike at its October 30 meeting, despite prior market expectations exceeding 60%. Her stance complicates the BOJ's tightening trajectory, potentially delaying rate increases until early next year. This delay risks further yen depreciation, with the currency already at 147 yen and potentially surpassing 150 yen, which could exacerbate import-driven inflation and pose challenges for the BOJ's policy communication and international relations.
TOKYO, Oct 5 (Reuters) - With Sanae Takaichi set to become Japan's prime minister, advancing expansionist economic policies, chances have risen that the central bank will avoid raising interest rates this month, though the pause may not last if it batters the yen. Takaichi, likely to become Japan's first female leader next week after winning the presidency of the ruling party on Saturday, stood out in the race as the only proponent of big spending and loose monetary policy. The Reuters Daily Briefing newsletter provides all the news you need to start your day. Sign up here. Advertisement · Scroll to continue Parliament is expected to vote the conservative nationalist in as premier on October 15 since her Liberal Democratic Party is the largest in parliament, though this is not assured as the LDP's coalition lost its majorities in both houses under her predecessor, Shigeru Ishiba. NEW LEADER COMPLICATES BOJ RATE HIKES Upon winning the race, Takaichi made clear the government will take the lead in setting fiscal and monetary policy - and that her priority would be to reflate demand and the broader economy. Describing recent price rises as driven by higher raw-material costs, Takaichi warned it was premature to declare victory over deflation as companies start to feel the pain from President Donald Trump's U.S. tariffs. Advertisement · Scroll to continue "What would be best would be to achieve demand-driven inflation, where wages would rise and drive up demand, which in turn causes moderate price rises that boost corporate profits," she told a press conference after her victory. Her ascension makes it more likely the Bank of Japan will refrain from raising rates on October 30, analysts say. "Takaichi is not seen as supportive of interest rate hikes, which could make it more difficult for the BOJ to proceed with tightening," said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute. "While rate hikes may not be ruled out entirely, the central bank could adopt a more cautious and gradual approach," he said, adding the next increase may be delayed until early next year. Some analysts, however, doubt whether Takaichi will push back too hard against the BOJ's plan for slow, moderate tightening as inflation - rather than Japan's long-time curse of deflation - is now the bigger economic problem, costing Ishiba's LDP a huge election loss in July. The BOJ ended decades of massive stimulus last year, raising its policy rate to 0.5% in January on the view Japan was on the cusp of durably achieving its 2% inflation target. Before Takaichi's victory, markets were pricing in more than a 60% probability of a rate hike this month, with inflation above target for more than three years, a hawkish board split at the September policy meeting and calls for a near-term rate hike by a dovish policymaker. But Governor Kazuo Ueda kept markets guessing last week, warning of global uncertainties that could discourage firms from raising wages. "Ueda appeared to be in no rush hiking interest rates anyway. Takaichi's win will make it even more likely the BOJ will take a wait-and-see mode and hold off raising rates in October," said Mari Iwashita, executive rates strategist at Nomura Securities. At the same time, former central bank official Nobuyasu Atago said, "The BOJ faces a new challenge of creating a channel of trust and communication with Takaichi's administration, which might take some time." 'THINGS HAVE CHANGED' SINCE ABE Takaichi has been a vocal advocate of "Abenomics", a hefty mix of government spending and monetary stimulus deployed by her mentor, then-premier Shinzo Abe, to pull Japan out of deflation and ease the pain of a surging yen on the export-reliant economy. Although she has toned down comments such as calling last year's rate hike "stupid", Takaichi has retained ties with reflationist-minded lawmakers and economists who advise her on policy. Her stance contrasts with that of Ishiba and his predecessor Fumio Kishida, who nodded to the BOJ's efforts to roll back stimulus as accelerating food inflation - partly caused by higher import costs from a weak yen - hit households. With markets fully pricing in another rate increase by early next year, delaying a hike for too long could unleash sharp yen falls that would boost import prices, exacerbating inflation. Some investors expect Takaichi's win to push the dollar, now around 147 yen, above 150 yen - a level of yen weakness that drew verbal warnings from Japanese authorities in the past. "Given her reflationist streak, there's a chance Takaichi could meddle in monetary policy," said former BOJ board member Takahide Kiuchi, who expects no rate hike this month. "But I don't think her administration would force the BOJ to overhaul its rate-hike plans altogether, unless the U.S. economy weakens significantly." Diplomatic considerations could also affect Takaichi's stance on monetary policy, some analysts say. The Trump administration, which favours a weaker dollar to boost U.S. exports, has signalled displeasure over the yen's softness, with Treasury Secretary Scott Bessent saying in August the BOJ was "behind the curve" in tackling inflation. Trump is expected to visit Japan this month, with some media reporting he could arrive days before the BOJ's October 29-30 meeting. "In the past the yen was strong, so low interest rates were acceptable. Now that higher inflation is causing difficulties, it's probably harder for Takaichi to criticise monetary policy as much as before," said Tomohisa Ishikawa, chief economist at Japan Research Institute. "Things have changed from when Takaichi used to work together with Abe." Reporting by Leika Kihara; Additional reporting by Satoshi Sugiyama, Makiko Yamazaki and Yoshifumi Takemoto; Editing by William Mallard Our Standards: The Thomson Reuters Trust Principles. The likely appointment of Sanae Takaichi as Japan's next prime minister introduces significant uncertainty into the Bank of Japan's (BOJ) monetary policy trajectory, effectively shelving expectations for an October rate hike. Market pricing, which had indicated a greater than 60% probability of a rate increase this month, has reversed sharply due to Takaichi's pronounced 'reflationist' stance, which prioritizes expansionist fiscal policy and loose monetary conditions. This political shift complicates the BOJ's position, as it has been grappling with inflation running above its 2% target for over three years. While Takaichi's policies echo the 'Abenomics' era focused on combating deflation, the current environment is defined by inflationary pressures, partly driven by a weak yen. A delay in policy tightening risks exacerbating this trend, potentially pushing the yen past the 150 per dollar level—a threshold that has previously triggered official warnings. The new administration's policy direction creates a dilemma for the BOJ, balancing the government's growth agenda against the need to manage inflation and currency stability, while also navigating potential diplomatic friction with the U.S. over the yen's softness.
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