Ishiba’s bad election bet will boost Bank of Japan

Fall guy. Sometimes, less is more. Japan’s Liberal Democratic Party is certainly hoping that’s the case. New Prime Minister Shigeru Ishiba’s gamble on a snap election next week could cost the LDP its outright majority in the lower house. But the result should allow the ruling party to hang on to power – and the Bank of Japan to continue raising interest rates.

Local media polls show that the LDP may not reach the 233 seats it needs for an outright majority in the 465-seat lower house in the election on Oct. 27. The likely electoral rout begs the question of why Ishiba, who became prime minister less than a month ago after winning a party election, has gone to the polls now.

The simplest answer is that the veteran politician wanted to minimise losses by catching the opposition off guard. Waiting another year, as the country’s law allowed him to do, could have enabled rival parties to gather more ammunition to shoot at the scandal-ridden LDP.

Nevertheless, the prime minister and his party may well receive an electoral drubbing, but they are likely to remain in power. That is the best the BOJ Governor Kazuo Ueda can hope for as he continues to reverse a decade of ultra-low interest rates.

The Constitutional Democratic Party of Japan, the LDP’s biggest rival in the lower house, has called for changing the BoJ’s inflation target from 2% to “above 0%”, opening the door to rate hikes even when inflation drops well below recent levels. In breach of the BOJ’s independence, the opposition also wants to create a target for the growth in wages over and above inflation, to be set jointly by the government and central bank.

Admittedly, Ishiba did shock markets on Oct. 2 by suggesting another rate hike was not yet justified but he quickly backtracked, voicing full support for the central bank’s right to set monetary policy. Still, losing an outright majority could weaken Ishiba’s grip on his own party just weeks after his elevation to prime minister put an end to the error-prone premiership of Fumio Kishida.

That kind of uncertainty doesn’t help Ueda. The BOJ chief has repeatedly said that he needs to see inflation remain above the central bank’s 2% target for a while before lifting short-term rates from the current 0.25% level. In the long run, a diminished LDP may mean that less is less for both Ishiba and Ueda.

Context News

Japan’s Liberal Democratic Party could lose its outright majority in the lower house after a snap election on Oct. 27, Reuters reported quoting polls from local news outlets. The Komeito Party, a more moderate LDP ally, could also lose seats. The Constitutional Democratic Party of Japan, the second-largest bloc in the lower house, has called for changing the Bank of Japan’s inflation target from 2% to “above 0%”, as well as the creation of a real wage growth target set jointly by the government and central bank.