Sanae Takaichi’s jab at the Bank of Japan’s independence may face political reality check

TOKYO — A pledge by Japan’s next likely prime minister to reassert government sway over the central bank has fanned worries about political interference in monetary policy, however, a weak yen and politics could limit any such push.

Sanae Takaichi is set to become Japan’s next premier and has already rattled markets by declaring control over the direction of monetary policy following her party leadership win, reviving memories of Shinzo Abe’s radical economic stimulus last decade.

“The government must be responsible for fiscal and monetary policy. The Bank of Japan (BoJ) will then consider the most appropriate means,” Takaichi told a news briefing upon her victory in the weekend race, stressing the need to focus on reflating growth.

Her leadership could present the biggest political challenge to Bank of Japan Governor Kazuo Ueda, a soft-spoken academic who took the helm two years ago charged with dismantling the radical monetary stimulus of his Abe-appointed predecessor.

The extent of Ms. Takaichi’s challenge, however, is likely to be tempered by the risks of inflation, a sharp yen decline and her own party’s weak standing — problems her late mentor Abe never faced.

Differences between the government and central bank, instead, are more likely to be seen in communications and expectations around the extent and timing of future interest rate hikes, analysts and sources say.

That alone could be enough to stir up market volatility.

“It’s a huge threat for the BoJ as her remarks show she has little respect for central bank independence,” said former BoJ board member Takahide Kiuchi.

“It’s quite likely she will interfere in monetary policy and try to keep rate hikes in check,” said Mr. Kiuchi, who sat at the board when former BoJ chief Haruhiko Kuroda deployed massive stimulus in 2013. “I’m sure people at the BoJ are very alarmed.”

CENTRAL BANK INDEPENDENCE UNDER FIRE
The challenge to the BoJ’s independence comes as central bank policy around the world, from the United States to New Zealand to Indonesia, comes under increasing pressure from new political leadership.

Under law that took effect in 1998, the BoJ nominally enjoys independence although that has not shielded it from past political pressure to expand monetary support for a moribund economy.

While the government cannot fire a sitting BoJ chief, it has the authority to pick the governor and members of the board, which then needs parliamentary approval.

The most extreme case of intervention came in 2013, when Abe hand-picked Mr. Kuroda to overhaul the BoJ’s caution over ramping up stimulus under then governor Masaaki Shirakawa.

Known more for her focus on nationalist policies, Ms. Takaichi’s economic views are nonetheless framed by advisers who advocate expansionary fiscal and monetary policy.

Such intervention could come directly through public comments by the premier and political aides, or in informal conversations among staff and executives, say sources with knowledge of past exchanges between the two sides.

Former BoJ Deputy Governor Masazumi Wakatabe, who has ties with Ms. Takaichi, said the BoJ will likely find it hard to justify raising interest rates this year given weakness in the economy.

CONSTRAINTS ABOUND
Unlike the Abe era, however, Takaichi’s urge to keep policy accommodative is likely to be constrained by new economic and political realities.

For one, the presence of veteran lawmakers with more conservative views on economic policy may counter Takaichi’s radicalism, analysts say.

Among them is former premier and finance minister Taro Aso, who was appointed party vice-president. He has pushed to keep heavily indebted Japan’s fiscal house in order and avoid overreliance on loose monetary policy to reflate growth.

Unlike during Mr. Abe’s days, Ms. Takaichi’s Liberal Democratic Party (LDP) rests on shaky political ground with its minority coalition facing the risk of a break-up that could deprive her votes needed to be elected premier in parliament.

Even if she becomes prime minister, Ms. Takaichi may be forced to appease opposition parties by handing over the key finance minister post to one of their leaders — adding uncertainty to how much clout she will have in making demands on the BoJ.

The economic backdrop, too, has changed dramatically from the days of Abenomics, when Japan had experienced two decades of deflation, subdued growth and a strong yen that hurt the export-reliant economy.

Now, Japan has seen inflation exceed 2% for well over three years as rising raw material costs, due in part to a weak yen, prod firms to hike prices.

Delaying rate hikes for too long could lead to a further sharp decline in the yen and worsen consumer inflation, which has been politically disastrous for Ms. Takaichi’s predecessors.

Rising living costs are seen as a key factor that led to the LDP’s huge loss in an upper house election in July.

Speculation Ms. Takaichi’s presence will force the BoJ to delay rate hikes has already pushed the yen to an eight-month low per dollar, drawing verbal intervention by Japanese authorities.

Ms. Takaichi may nod to a near-term rate hike if yen falls persist and threaten to push up already high living costs, said former BoJ executive Kazuo Momma, who oversaw negotiations with Abe’s administration.

“The biggest loser from a weak yen is the government,” Ms. Momma said. “If Takaichi’s approval ratings were to fall from the outset, it would be because of a weak yen. I’m sure people around her like Aso are well aware of that.” — Reuters