A turbulent political landscape expected after the July 20 House of Councillors election could prolong the Bank of Japan's rate hike pause, putting the country's fight against high inflation on the back burner, economists say.
The embattled ruling coalition led by Prime Minister Shigeru Ishiba is a new headache for the central bank, which has already put its monetary policy normalization on hold due to uncertainties over U.S. President Donald Trump's "reciprocal" tariffs, they say.
"As prices for a variety of items and services are likely to remain high and rise further, the risks for the BOJ falling behind the curve could heighten," Ryuichiro Hashimoto, an economist at Barclays Securities Japan, said.
Japan's core consumer prices in May rose 3.7 percent from a year earlier, marking the biggest increase since January 2023, as rice and other food costs surged, according to government data.
The upper house election comes as the BOJ, under the helm of Governor Kazuo Ueda, has pursued a rate hike path following a decade of unorthodox easing, raising its key rate three times since March last year.
But the central bank kept its benchmark rate unchanged at 0.5 percent at its June policy meeting, the third straight gathering without a policy adjustment, with Trump's tariff policy clouding the outlook for Japan's export-oriented economy.
Most BOJ watchers expect that the bank will not make a policy move at the upcoming meeting to be held within two weeks of the national election.
"It seems only natural" for the BOJ to postpone a rate hike until later this year or beyond, based on its current approach of signaling policy shifts in advance, said Koichi Fujishiro, an economist at the Dai-ichi Life Research Institute.
Rising prices have been dominating the election campaign, but parties are advocating different approaches to addressing them.
Ishiba's Liberal Democratic Party and its junior coalition partner Komeito have pledged cash handouts, while opposition parties have called for consumption tax cuts, amid the rising cost of living.
More voters remain skeptical about the benefit of the ruling camp's payout plan in media polls, showing stronger support for opposition parties' tax cut proposals and suggesting the ruling camp may continue to face pressure to heed demands from opposition forces even if it retains majority control in the upper chamber.
The ruling coalition does not have a majority in the more powerful House of Representatives, or lower house. Its election loss would raise the risk of Ishiba losing his grip on power and trigger political wrangling over economic measures, economists say.
Barclays' Hashimoto said it would be difficult for the BOJ to implement rate hikes while stimulus steps are being discussed.
While the BOJ's rate hike may come under the spotlight as a way to curb rising prices, the ruling coalition's poor election performance could trigger a change of leadership and put the central bank, which wants to continue on its rate hike path, in a difficult situation, economists say.
Sanae Takaichi, former economic security minister who was narrowly defeated by Ishiba in the LDP's presidential race last September, then called for continued monetary easing and aggressive fiscal spending.
Following the late July policy meeting, BOJ board members are scheduled to meet in September.
Fujishiro of Dai-ichi Life warns that the BOJ's inaction may further intensify inflationary pressure by leaving the yen weak in the currency market and pushing up the import cost for the country, which buys most of its energy resources from abroad.
© KYODO
