Japan: A New Page?

On the 4th of October, Sanae Takaichi has beaten Shinjiro Koizumi to be the new LDP party leader. She has always been a top contender but was closely matched by Koizumi, who did not received more support in the second round of vote as expected. Sanae Takaichi is holding a hawkish view against immigration and seem to be tapping into the nationalist side by suggesting review of current U.S.-Japan trade agreement. However, the LDP coalition does not have the numbers in the house and would require co-operation with opposition. It would seems to be unwise if the new Japanese PM to tackle both external and internal at once. Takaichi may focus on domestic issue, such as lowering consumption tax, increasing fiscal spending while scratching her head to increase government income to avoid further fiscal imbalance before exerting herself against Trump. 

And what does this mean for the BoJ and monetary policy? Sanae Takaichi was a firm supporter of "Abenomics" and market participants seems to believe she will likely preach the same philosophy. Market pricing of an imminent October hike has mostly been called off with almost zero expectation of more hiking in 2025. So far, we have not heard any direct attack towards the BoJ but Takaichi 's remark do warrant concern on BoJ's tightening steps. 

In reality, Japan is facing steep underlying inflation that is brought by changes in business price/wage setting behavior. By hiking rates, the BoJ is going to be against the agenda of government as Takaichi suggest that SMEs will need help to increase wages. Instead, the BoJ may rely on their original plan to reduce JGB purchase and asset sale to indirectly tighten. The odds of an imminent hike seems to have diminished yet we believe the BoJ could still hike interest rates by 25bps in 2025.