Fiscal uncertainty adds to case for BoJ inaction

Sanae Takaichi won Saturday’s LDP leadership elections but is struggling to gather enough support in parliament to become PM as long-standing partner Komeito has threatened to abandon the coalition. Even if Komeito stays on board, Takaichi will have to make concessions to the smaller opposition parties, who favour looser fiscal policy. The resulting uncertainty about the fiscal outlook coupled with the fact that Takaichi is putting pressure on the Bank of Japan to keep policy loose means that we’re pushing back our forecast for the next BoJ rate hike from October to January. However, any fiscal expansion would strengthen inflationary pressures and ultimately force the Bank to tighten policy in earnest.