BOJ’s slow, dovish revamp casts doubt over long-term rate-hike plans

TOKYO, June 30 (Reuters) – Political pressure on the Bank of Japan to slow its interest rate hikes is growing amid a push by Sanae Takaichi’s government to restore dovish policymakers to the ​bank, a shake-up that could change its long-term policy direction.

While recent calls by Prime Minister Takaichi and her political allies for borrowing costs to stay low are not expected ‌to affect near-term rate hike plans, new appointments to the BOJ could revive older arguments about why Japan needs monetary stimulus to sustain growth.

Wary of accelerating an unwelcome yen slide and drawing the ire of Washington, the administration remained quiet as the BOJ laid the groundwork for its decision in June to raise interest rates to a 31-year high of 1%.

But Economy Minister Minoru Kiuchi, who attended the June meeting, urged the BOJ to heed the administration’s initiatives to promote growth in ​making future decisions, in a sign of the government’s reservation over future rate hikes.

In its first economic blueprint to be finalised in July, the Takaichi administration will also call for monetary ​policy to align with government efforts to boost growth, a draft seen by Reuters showed in a sign of its preference for the BOJ to keep ⁠borrowing costs low.

The government’s main strategy for now likely centres on gradual changes to the makeup of the bank. Already, such changes are being read as a signal of a dovish shift.

“The Takaichi administration ​can’t openly criticise the BOJ’s monetary policy for fear of upending markets,” said former BOJ board member Makoto Sakurai. “But she can wield influence with personnel decisions. That’s a very powerful weapon.”

Known as a fan ​of “Abenomics,” Takaichi took office last October with a pledge to revive the economy with big spending plans that would benefit from low interest rates.

Her first appointee to the BOJ board, Toichiro Asada, voted against the June hike. The second, Ayano Sato, joined on Tuesday and is also seen as favouring loose policy.

The two hawks, Naoki Tamura and Hajime Takata, would see their five-year terms end in July next year, giving Takaichi a chance to fill the nine-member board with more doves.

The ​biggest test would come when governor Kazuo Ueda sees his term end in early 2028. Ueda was chosen by former Prime Minister Fumio Kishida with a mandate to exit the BOJ’s massive stimulus.

Concern over ​Ueda’s health had already cast doubts on how forcefully the BOJ could protect its independence. The 74-year-old governor missed the June meeting for medical treatment and has not spoken publicly since being discharged from hospital on June 19.

Ueda’s successor, ‌likely to ⁠be chosen by Takaichi given her strong grip on power after this year’s landslide election win, may be handed a completely different mandate.

Some market players cite former Deputy Governor Masazumi Wakatabe, a reflationist academic with ties to Takaichi, as among strong candidates to succeed Ueda.

For now, the BOJ is undeterred in its inflation-fighting mode as the Iran war-driven energy shock adds to mounting price pressures from a weak yen.

In a speech last week read out by his deputy, Ueda repeated the BOJ’s pledge to keep raising rates, warning of the risk of an inflation overshoot above the bank’s 2% target.

Hawkish board member Tamura also called for raising ​rates about once every few months, stressing the ​need for the BOJ to fulfil its role ⁠as guardian of price stability.

Some BOJ policymakers flagged brisk AI-related demand as boosting growth and inflation, a summary of their June meeting showed, a sign of their resolve to keep raising rates.

“Japan will likely see price rises broaden, which should remain the BOJ’s focus,” a source familiar with the BOJ’s thinking said. “The ​BOJ’s policy approach stays unchanged.”

BOJ staff estimate Japan’s nominal neutral rate – or the level that neither cools nor overheats growth – to sit in a ​range of 1.1% to 2.5%, ⁠suggesting scope for more hikes.

Most analysts polled by Reuters expect the BOJ to raise rates to 1.25% by year-end and to 1.5% by mid-next year.

Market forces may also serve as a buffer against political pressure. The June hike has failed to reverse a weak-yen trend that has hurt households by pushing up import prices.

Pushing back against rate hikes could prove costly with the yen already hovering at four-decade lows, and prospects of U.S. rate hikes ⁠bolstering the dollar.

“If ​the Fed resumes rate hikes, that may force the BOJ to speed up rate hikes,” a second source said. The ​sources spoke on condition of anonymity due to the sensitivity of the matter.

Still, politics looms as a risk for all these scenarios.

Ryutaro Kono, chief Japan economist at BNP Paribas, projects the BOJ will raise interest rates in October, pointing to the fact the ​central bank is highlighting robust AI demand as among factors that add inflationary pressure.

“But we cannot deny the risk of political considerations delaying the rate-hike timing,” Kono said.