The next prime minister is unlikely to change fiscal or other policies sufficiently to force the central bank to amend its monetary settings, a Bloomberg survey showed.
All-but one of 47 economists expect the Bank of Japan will keep its yield-curve control and asset-purchase programs unchanged at a two-day meeting ending Sept. 22. That’s one week before the ruling Liberal Democratic Party holds a leadership vote that effectively determines the next prime minister.
While the BOJ remains independent, like counterparts across the world it would be cognizant of politicians’ views. Former Prime Minister Shinzo Abe is a good example: His goal of reviving inflation via massive easing was implemented by the central bank. Still, there are few concrete expectations for the winner on Sept. 29.
Some 84% of survey respondents predict there won’t be any meaningful change in monetary policy as a result of the new political leadership, while the other 14% say it’s hard to tell.
On top of that, like much of the global central banking community, the BOJ is running up against the limits of what it can do.
“The leading role for Japan’s economic policy has already shifted to fiscal policy from monetary easing,” said Kentaro Koyama, chief economist at Deutsche Bank Group. “That will stay the same under a new leadership.”
A key agenda item for the BOJ’s gathering next week will be how Gov. Haruhiko Kuroda and his board assess the economic impact of a surge in COVID-19 cases over the summer. Some board members have already indicated that the outbreak delayed a recovery. Meanwhile, many of the nation’s key economic hubs are set to remain under a state of emergency until the end of this month.
No economists see the central bank signaling a scaling back of COVID-related measures in the final three months of the year, down from the previous 18% expectation in a survey two months ago.
The BOJ is set to remain at the back of the pack among global peers. The European Central Bank decided to slow the pace of its pandemic-driven bond purchases at last week’s meeting, and the U.S. Federal Reserve will be wrapping up its meeting hours after the BOJ. The U.S. central bank is expected to begin tapering later this year.
In a separate Bloomberg survey of economists, most of the respondents predicted vaccine chief Taro Kono will win the LDP race and that he will support more stimulus for the pandemic-hit economy and continuity in central bank policy at least for now.
Some 27 out of 36 respondents in a survey of economists see Kono winning the race to replace outgoing Prime Minister Yoshihide Suga. Six analysts said they expect Fumio Kishida, a former foreign minister and ex-ruling party policy chief, to win.
Like Kishida and his other main rival, former internal affairs minister Sanae Takaichi, Kono says he supports more emergency fiscal spending to help Japan’s flagging recovery, but he’s sounded more cautious about the size of the package than the others.
The median estimate from economists is for ¥30 trillion in new fiscal spending. Half of the survey respondents said they expect more government borrowing will be needed to fund the package.
No matter who wins the race, economists see little immediate pressure to change the direction of central bank policy. Longer-term, analysts see Kono being in the position to nominate a new chief at the Bank of Japan who might favor a faster pullback of stimulus than Kuroda, whose terms ends in early 2023. Kono has signaled doubts about the bank’s elusive 2% inflation target.
“Whoever the next prime minister is, emergency measures in monetary policy will have to continue until the pandemic is over,” said economist Mari Iwashita at Daiwa Securities Co. “From the second half of next year, picking Kuroda’s successor will be important for the BOJ to move toward normalization.”
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