TOKYO -- As Japan's ruling Liberal Democratic Party prepares to elect next week a new leader -- who will also become the next prime minister -- the Bank of Japan's Sept. 22 monetary policy meeting was a quiet affair that focused on funding to fight climate change, an issue floated at the previous meeting.
Any more significant BOJ decisions at this important juncture would be scrutinized for political implications, so the central bank leadership deemed it wise to avoid big policy moves.
However much the BOJ bites its lip for now, it has a close eye on the leadership race since Japan's next prime minister will have a significant impact on monetary policy.
Of the four candidates, Taro Kono, the popular minister of regulatory reform, attracted BOJ attention initially. In 2017, the LDP's Headquarters for Promoting Administrative Reform was under Kono when it put out a document encouraging dialogue with the market on the exit from unconventional monetary easing.
The BOJ said that "discussing an exit strategy would lead to speculation that the end of the easing policy is near and confuse the market." The central bank was remained cool toward Kono's initiative.
More recently, Kono said monetary policy could not suddenly be changed in the midst of the COVID-19 pandemic. He had apparently concluded that speculation over an exit plan might confuse markets and negatively impact policy management. Kono's change of tone came as a relief to the BOJ.
But another candidate, Sanae Takaichi, a former minister of internal affairs and communications, has become a fresh cause for BOJ concern. She has proved more popular in the leadership derby that was anticipated, and has urged the BOJ to take employment levels into account as well as prices. The Bank of Japan Act makes the BOJ responsible for price stability, but does not include employment expansion in its mandate.
Opinion polls confirm growing support for Takaichi among the LDP rank and file. A Sept. 18 survey by Mainichi Shimbun and the Social Survey Research Center found that 50% of them favored Kono. Takaichi polled 25%, followed by former policy chief Fumio Kishida with 14%, and Seiko Noda, the LDP's acting secretary general, with 3%.
A Yomiuri Shimbun survey over the weekend of LDP members and supporters gave Kono 41% approval, and showed a narrow reversal of places between Kishida and Takaich with 22% and 20% respectively. Another survey of LDP lawmakers, who have half the ballots in the first round, showed Kishida, Kono and Takaichi in much closer competition, with 25%, 22% and 19% respectively.
There are a total of 764 ballots in the first round, of which 382 go to lawmakers in the Diet and the other 382 are split among rank-and-file party members nationwide.
If no candidate can win more than half the votes, the two top-polling candidates proceed to a runoff. There are only 429 ballots in the second round of which 382 go to Diet members and 47 to one party member from each prefecture.
Kono is generally expected to come out top in the first round, but there are mounting doubts that he will manage the simple majority. Observers increasingly believe there will have to be a runoff, and that it will be against Kishida. Takaichi remains a "person of interest" for the Bank of Japan, however.
Kishida is expected to win over support from Takaichi's backers in a runoff, meaning his indebtedness to the increasingly popular former minister will grow.
If Kishida does win the runoff and forms a cabinet, "He will need to treat Takaichi, who fought on his behalf, very well," Ryutaro Kono of BNP Paribas Securities, told Nikkei. In that scenario, Takaichi's political clout would grow.
Some market participants believe the BOJ plans to move ahead with revising its unconventional monetary easing during the next administration. The central bank isexpected to revise the joint statement it made with the government in 2013 to make the 2% inflation target more long-term, and to make the policies of negative interest rates and long-term interest rate guidance more flexible.
A BOJ official involved in drafting the joint statement told Nikkei that there is no denying this possibility, "but revising the statement is not as easy as it looks from the outside." He said the revision might give the impression that the exit from easing is coming, and that would risk confusion in the market.
Although Takaichi's conservative arguments may attract public opposition, her presence in the next administration would likely encourage the Bank of Japan to prolong its policy of very low level interest rates. Takaichi would expect monetary policy to play a part in supporting fiscal spending with low and stable long-term interest rates. She has said: "Until the price stability target of 2% is achieved, we will freeze the target of achieving surpluses in the primary balance of the central and local governments and prioritize strategic fiscal stimulus."
Takaichi enjoys the support of Shinzo Abe, the former prime minister. "Ms. Takaichi may also play a role in monitoring Kishida to make sure he does not stray from the Abenomics path of flexible fiscal policy and bold monetary policy," a former official said.
The political outlook is hard to predict, particularly when a general election will follow hard on the heels of the LDP leadership derby. The BOJ always needs to be alert to changes in the political climate and their impact on its policies -- particularly when the new governor and deputy governor are due to be appointed under the next administration in early 2023.