Japan's new leader, Sanae Takaichi, could bring a delay to the Bank of Japan's (BOJ) rate hikes, but this pause may not last if it impacts the yen negatively. With Takaichi, Japan's first female prime minister, at the helm, the country's economic policies are set to take a more expansionist turn.
Takaichi's victory as the ruling party's leader has reduced the chances of an October rate hike, according to analysts. However, it's important to note that this delay doesn't necessarily mean the end of rate hikes altogether.
But here's where it gets controversial... Takaichi, an 'Abenomics' acolyte, has a different approach to her predecessors. She believes in demand-driven inflation, where rising wages stimulate demand and moderate price increases boost corporate profits. This contrasts with the previous government's focus on tackling deflation.
With inflation now a bigger concern than deflation, some analysts question whether Takaichi will resist the BOJ's plans for gradual tightening. The central bank ended its massive stimulus last year and raised its policy rate to 0.5% in January, aiming to achieve its 2% inflation target.
Markets were initially pricing in a high probability of a rate hike this month, but Takaichi's win has shifted the odds. Governor Kazuo Ueda's recent comments about global uncertainties further add to the uncertainty.
And this is the part most people miss... The BOJ now faces the challenge of building trust and communication with Takaichi's administration, which could take time.
Takaichi's advocacy for 'Abenomics' and her ties with reflationist lawmakers and economists highlight her commitment to reflating demand and the economy. However, her stance differs from her predecessors, who acknowledged the BOJ's efforts to roll back stimulus in response to rising food inflation.
Delaying rate hikes for too long could lead to a sharp fall in the yen, which would boost import prices and worsen inflation. Some investors expect the dollar to rise above 150 yen, a level that has previously drawn warnings from Japanese authorities.
Former BOJ board member Takahide Kiuchi believes Takaichi might influence monetary policy, but her administration is unlikely to force a complete overhaul of the BOJ's rate hike plans unless the U.S. economy weakens significantly.
Diplomatic considerations, such as the Trump administration's preference for a weaker dollar, could also influence Takaichi's stance on monetary policy.
In conclusion, while Takaichi's win may delay the BOJ's rate hikes, it's a complex situation with potential consequences for the yen and inflation. The new administration's approach to monetary policy will be closely watched, especially with Trump's expected visit to Japan this month.
