Market News

(Bloomberg) — Bank of Japan Governor Kazuo Ueda will likely face a tougher political environment in the second half of his five-year term starting Thursday after the ruling party leadership victory of Sanae Takaichi, a critic of interest rate increases.

Ueda already faces a dilemma. The central bank appeared to be laying the groundwork for its first interest rate hike since January later this month. Now, following Takaichi’s win, if Ueda goes ahead with an increase he risks antagonizing a premier who might then seek more sway over the BOJ’s decisions going forward.

If he stands pat, as suggested by one of Takaichi’s economic advisers, analysts may conclude that he is already pushing back a hike in response to Takaichi’s victory. That might cause the yen to weaken further, presenting both Ueda and Takaichi with a currency issue and a wait of almost two months until the next policy meeting.

Ueda may find the latter half of his term is marked not just by how far he can raise rates, but also by his ability to maintain the central bank’s boundaries of independence.

“I had sensed an increasing chance of an October hike with recent solid economic data and policy signals from the BOJ,” said Tsuyoshi Ueno, chief economist at NLI Research Institute. “But with Takaichi’s win, that risk has dissipated. Hiking will be tougher going forward.”

There’s little doubt over Ueda’s drive to clear up the remains of the BOJ’s massive stimulus program as the nation gets used to the return of inflation.

He has already largely exceeded expectations by scrapping the bank’s manipulation of bond yields, reining in its colossal bond-buying and stopping its purchases of other risk assets. He also has a plan to offload exchange-traded funds, and all this before reaching the halfway point of his term.

Throughout this time, he’s essentially been untroubled by government policymakers. Raising rates from negative territory at a gradual pace has made sense to a lot of people in the face of ongoing inflation.

Enter Takaichi. Last year, she described BOJ moves to raise rates as “stupid,” a comment that left investors with the impression she will put a brake on rate hikes should she become prime minister. She is expected to be voted in as premier in a parliamentary vote in mid-October.