Japan will welcome the second "Abe"? Prime Minister's popular candidate clearly opposes, casting a shadow over the Bank of Japan's rate hike path

Zhitong Finance APP noted that political uncertainty, as well as the unexpected emergence of a candidate advocating re-inflation in the leadership election of the ruling party in Japan, may put pressure on the Bank of Japan to slow down the pace of further interest rate hikes, moving away from historical lows.

Due to the risks of a US economic recession and volatile financial markets casting a shadow over economic prospects, the Bank of Japan has already toned down some signals regarding future interest rate hikes.

Now, with the competition heating up for the new leader of the Liberal Democratic Party, a new complex political situation has emerged. The LDP presidential election is set to receive votes on the 27th, with the current high-profile contenders being former Secretary-General Shigeru Ishiba, former Environment Minister Shinjiro Koizumi, and Minister of Economic Security Seiko Noda. Given that two of these three are almost certain to advance to the second round of voting, the intense behind-the-scenes struggle for lawmaker votes is already underway.

According to a survey released by a Japanese media on the 22nd, 26% of respondents support Shigeru Ishiba, 17% support Seiko Noda, and 14% support Shinjiro Koizumi. Other 6 candidates, including Foreign Minister Toshimitsu Motegi and Digital Minister Taro Kono, have support rates of less than 5%.

Seiko Noda supports the "Abenomics" stimulus policy of the late former Prime Minister Shinzo Abe. This once dark horse candidate may become Japan's first female leader and is the only one opposing further interest rate hikes.

Seiko Noda stated, "What we are seeing now is cost-push inflation. We must maintain loose monetary policy until actual wages stabilize and turn positive."

"I think raising interest rates now is foolish," she said in an interview on Monday, warning that doing so could lead Japan back into deflation.

Some analysts believe that Shigeru Ishiba and Shinjiro Koizumi have an advantage over Seiko Noda, but polls show that both sides are evenly matched.

Naomi Muguruma, Chief Bond Strategist at Mitsubishi UFJ Morgan Stanley Securities, said, "If Seiko Noda wins, the initial market reaction will be a decline in the yen, as the market expects a delay in future rate hikes."

Resurgence of "Deflation" Discourse

Under pressure from then-Prime Minister Shinzo Abe, the Bank of Japan implemented aggressive stimulus measures in 2013, which later evolved into a complex policy framework to raise weak inflation to the central bank's 2% target.

Due to rising raw material costs and tight labor market pushing up inflation and wage levels, the Bank of Japan exited the policy in March and raised interest rates to 0.25% under the leadership of Governor Haruhiko Kuroda in July.

Analysts say that the resignation of Japanese Prime Minister Fumio Kishida itself is a blow to the Bank of Japan's exit strategy. Fumio Kishida appointed Haruhiko Kuroda and broadly supported the gradual exit from large-scale monetary stimulus policies Nobuyuki Kinouchi, former board member of the Bank of Japan and now an economist at Nomura Research Institute, said, 'The situation at the Bank of Japan will not improve compared to when Fumio Kishida was Prime Minister, regardless of who wins in the LDP election. If Kishida wins, the Bank of Japan will find it difficult to raise interest rates.'

Some analysts say that even if Sanae Takaichi does not become Prime Minister, her strong performance in the election may help her secure a key cabinet position and put pressure on the next Prime Minister.

Currently serving as Minister of Economic Security, Sanae Takaichi has the support of lawmakers and scholars who played key roles in Abenomics, such as Etsuro Honda, who once served as an economic assistant to Shinzo Abe.

Despite the passing of Shinzo Abe and the rise in inflation pushing back lobbying efforts for reflation, massive spending and ultra-low interest rates remain popular among conservative LDP supporters, complicating efforts to wean the Japanese government off large-scale stimulus.

While the Bank of Japan is institutionally independent, it is sensitive to political dissatisfaction with its policies and has been a target of public anger in the past, with many attributing the decade-long economic stagnation since the late 1990s to premature tightening policies.

Although only LDP members and lawmakers voted in Friday's election, some members of the public appreciate Sanae Takaichi's economic plans.

Kazuo Ueda stated in a speech on Tuesday that Japan 'must avoid slipping back into deflation,' acknowledging political concerns about rising borrowing costs.

'Whoever becomes the new leader of the LDP, whatever beliefs they may have, we hope to communicate closely with the new government,' Kazuo Ueda said at a press conference.

There is also uncertainty about whether other leading candidates will support further rate hikes. Shigeru Ishiba, who has criticized the Bank of Japan's negative interest rate policy, recently told reporters that completely escaping deflation is crucial. Views on monetary policy from Taro Kono are less known.

Kiuchi of Nomura Securities said that while a victory for Sanae Takaichi may be the worst-case scenario for the Bank of Japan, if the Japanese economy is hit by adverse factors such as a surge in the yen and weak global demand, other candidates may also hinder its rate hike plans.

'Many candidates seem to support rate hikes as it helps slow down the depreciation of the yen and inflation. However, if the economy weakens, this situation may change, with the focus shifting to slowing growth.'