By Leika Kihara
TOKYO- Bank of Japan Governor Kazuo Ueda’s efforts to lift rock-bottom borrowing costs face fresh challenges as a yen rebound and the new political leadership’s preference for loose monetary policy raise the hurdle for rate hikes.
New Japanese premier Shigeru Ishiba stunned markets this week when he said the economy was not ready for further rate hikes, an apparent about-face from his previous support for the BOJ unwinding decades of extreme monetary stimulus.
The surprisingly blunt remarks pushed the yen lower against the dollar and cast fresh doubts over how aggressive the BOJ would be in raising rates.
While politics is unlikely to derail the longer-term case for rate hikes, analysts say policy deliberations could get bumpy heading into a general election due Oct. 27.
“I don’t think the remarks were intended to apply huge pressure on the BOJ. Rather, Ishiba probably had the election in mind,” said Katsuhiro Oshima, chief economist at Mitsubishi UFJ Morgan Stanley Securities. “He was seen by markets as a hawk, so may have wanted to fine-tune that image a little bit.”
The looming election this month means many analysts expect the BOJ will hold off raising rates at its Oct. 30-31 meeting.
Ueda was appointed last year by former Prime Minister Fumio Kishida, who stepped down in September and had endorsed the BOJ’s exit from its radical monetary stimulus.
The BOJ in March delivered its first rate hike in 17 years, arguing the pace of price and wage increases showed Japan was finally shaking its entrenched deflationary mindset.
The bold shift to a tightening bias, however, hit a snag this week with Ishiba’s new cabinet reaffirming with the BOJ a 2013 statement that commits both sides to focus on reflating a stagnant economy.
To be sure, pressure for the BOJ to immediately hike rates again this year had already eased ahead of Ishiba taking office, thanks in part to a rebound in the yen off a three-decade low hit in July, which moderates inflationary pressure from import costs.
Predicting the political clouds, the BOJ has already laid the groundwork to pause. After keeping rates steady last month, Ueda signaled that the BOJ is in no rush to hike with markets still unstable and US economic uncertainties heightening. – Reuters
