"If Takaichi Wins, Monetary Easing"…Is Japan's October Rate Hike Off the Table?

Expectations for a Bank of Japan October policy rate hike recede

Leading candidate for next prime minister Sanae Takaichi is a reflationist

Supports policies to induce inflation through monetary easing

Expectations that the Bank of Japan will raise its policy rate in October are receding. The next hike would be historic as it would break through the '0.5% policy rate barrier' that has held for 30 years, but there is growing speculation that it may not happen this autumn.

The Nihon Keizai Shimbun on the 14th cited political uncertainty as the primary reason why a Bank of Japan rate hike in October would be difficult. Sanae Takaichi, a former minister of economic security who is the new Liberal Democratic Party leadership frontrunner and a likely next prime minister, is described as a reflationist. Reflationists are a group that support policies to induce inflation through monetary easing.

Takaichi, also nicknamed the "female Abe," is likely to inherit former Prime Minister Shinzo Abe's economic policies centered on the "three arrows" of monetary easing, fiscal expansion, and structural reform — Abenomics. The Nihon Keizai Shimbun reported, "There is a view that if Takaichi wins, there will be a headwind against an early policy rate hike."

After the Bank of Japan left its policy rate unchanged at an annual 0.5% for the fourth consecutive time in July, market talk of an October hike spread. Backed by agreements such as the US-Japan tariff negotiations, the market-implied probability of an October hike once climbed to the mid-40% range.

The situation changed in September. Shigeru Ishiba announced his intention to resign as LDP president. The market-implied probability of an October hike fell at one point to around 20%, and it still remains in the low 30% range. Adding the implied probabilities for December (about 30%) or next January (about 20%) reaches 50%, making winter rather than autumn the main scenario for the next hike.

For the September Monetary Policy Meeting scheduled for the 18th–19th, the implied probability of a policy rate hike is only 1%. The Yomiuri Shimbun reported on the 13th that "there are many opinions within the Bank of Japan that it is necessary to watch the impact of US tariff policy," and that "it is highly likely that the rate will remain unchanged at the current annual 0.5% in September."

Many observers say that even if someone other than Takaichi becomes the next prime minister, it will be difficult for the Bank of Japan to raise the policy rate in October. The LDP will hold its leadership election on the 4th of next month. The new prime minister is likely to be decided as early as early October. There is a view that the new prime minister will take office before the Bank of Japan's October Monetary Policy Meeting (29–30).

The Nihon Keizai Shimbun said, "Questions are being raised as to whether the Bank of Japan could raise the policy rate less than a month after the new prime minister takes office." Building communication channels and exchanging opinions with the new government will require some time. The last time the Bank of Japan raised its policy rate was in January, three months after Shigeru Ishiba took office as prime minister.

Of course, the most important factor in deciding the timing of a policy rate hike is economic and price developments, not political trends. But analysis suggests that economic and price conditions are also not straightforward. The most important factor is the impact of U.S. President Donald Trump's tariff policy.

The Nihon Keizai Shimbun noted, "How tariffs might negatively affect the U.S. economy and hurt the profits of Japanese companies, and how that impact will decisively influence the course of next spring's labor-management negotiations, is critically important." It said it would be difficult to make that assessment in October.

The Bank of Japan itself set the timing for predicting next year's wage increases at the December Short-Term Survey of Enterprises. The Nihon Keizai Shimbun analyzed, "It appears the Bank of Japan has acknowledged that the earliest point at which it can gauge the direction of next spring's labor-management negotiations is December." In the end, experts view the possibility of a policy rate hike in October as extremely low.

Tokyo=Kim Il-gyu, correspondent