By Leika Kihara
TOKYO (Reuters) – With Sanae Takaichi on the brink of becoming Japan’s next prime minister, the likelihood of the central bank opting against an interest rate hike this month has increased. However, this pause could change if it leads to further declines in the yen’s value.
Takaichi, poised to be Japan’s first female leader next week after securing the ruling party’s presidency on Saturday, stands alone among the candidates advocating for substantial government spending and relaxed monetary policies.
The conservative nationalist is expected to be confirmed as premier on October 15, backed by her Liberal Democratic Party, which holds the most seats in parliament. Nonetheless, her coalition faces challenges having lost its majorities in both chambers under former prime minister, Shigeru Ishiba.
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Post-election, Takaichi emphasized that the government would take the reins regarding fiscal and monetary policies, prioritizing efforts to stimulate demand and invigorate the economy.
While attributing recent price surges to rising raw material costs, Takaichi cautioned against prematurely declaring victory over deflation, especially as companies begin to feel impacts from U.S. tariffs under President Donald Trump.
“The ideal scenario would be to create demand-driven inflation that encourages wage growth, which boosts demand and results in moderate price increases that enhance corporate profits,” she expressed during her post-victory press conference.
Analysts suggest her leadership may lead the Bank of Japan to pause any interest rate hikes on October 30.
“Takaichi is viewed as unlikely to support higher interest rates, which could hinder the BOJ’s efforts for tightening policy,” noted Kazutaka Maeda, an economist from Meiji Yasuda Research Institute.
“While a potential rate hike hasn’t been entirely dismissed, the central bank might adopt a more careful and gradual approach,” he added, projecting that any increase could be postponed until early next year.
Conversely, some analysts express skepticism about Takaichi’s willingness to resist the BOJ’s strategy of slow and moderate tightening, given that inflation has become a more pressing concern than deflation, which previously led to significant electoral setbacks for Ishiba’s LDP in July.
After decades of extensive monetary stimulus, the BOJ raised its policy rate to 0.5% in January, believing Japan was nearing a stable achievement of its 2% inflation target.
Prior to Takaichi’s victory, the markets had factored in a greater than 60% chance of a rate hike this month, amid persistent inflation exceeding targets for over three years, a division within the board during the September policy meeting, and calls for a near-term hike by a more dovish policymaker.
