
How Japan's election outcome muddles the BOJ's policy path
Lingering political uncertainty may also weaken the yen and push up import costs, some analysts say, adding to mounting price pressures that conflict with the Bank of Japan's current approach to stand pat until the political storm calms.
The rising cost of living was among factors that led to the bruising defeat of Prime Minister Shigeru Ishiba's ruling coalition in upper house elections on Sunday. With inflation holding above the BOJ's 2% target for over three years now, some BOJ board members have already warned of growing price pressure.
Junko Koeda recently argued for the need to monitor second-round effects from rising rice costs. Another board member, Hajime Takata, said this month the BOJ must resume rate hikes after a temporary pause as Japan was on the cusp of achieving the bank's 2% target.
"If upward inflation risks heighten, the BOJ may need to act decisively as a guardian of price stability," its hawkish policymaker Naoki Tamura said late last month.
Now a minority in both chambers of parliament, Ishiba's ruling camp must compromise with opposition parties, which have called for tax cuts and bigger spending, to pass legislation.
In a nod to such calls, Ishiba said on Monday he would stay on as prime minister and work with other parties on measures to cushion the blow to households from rising inflation.
While a cut to the consumption tax would leave a huge hole in Japan's worsening finances, doing so would require passing legislation through parliament and take time.
More likely would be for Japan to compile an extra budget in autumn to fund payouts and tax breaks. The size could exceed last year's 14-trillion-yen ($95 billion) package given heightening opposition demands for bolder steps, analysts say.
"A supplemental budget this fall to help firms cope with U.S. tariffs was expected even before the vote. Now, opposition parties may demand a larger package," said David Boling, a director at consulting firm Eurasia Group.
To be sure, Japan's economy may need the fiscal boost after shrinking in the first quarter and seen taking a hit from U.S. tariffs that are already hurting its mainstay automobile sector.
But market worries over Japan's huge debt and political instability could weaken the yen, and cast doubt on the BOJ's view cost-push pressure will ease later this year, analysts say.
"With Ishiba signaling his resolve to stay on as premier, markets are now in a wait-and-see mood. But that doesn't mean the chance of yen declines has disappeared, as the election definitely weakened administration's standings," said Tsuyoshi Ueno, an economist at NLI Research Institute.
Unlike other major economies, Japan's inflation-adjusted real interest rates remain deeply negative due to the slow pace at which the BOJ rolled back a decade-long, massive stimulus.
After raising short-term interest rates to 0.5% in January, Governor Kazuo Ueda has signaled a pause in rate hikes until there is more clarity on the economic impact of U.S. tariffs.
Given the risk from U.S. tariffs, many analysts now expect no rate hike for the rest of this year. But staff BOJ estimates suggest its policy rate must rise at least to 1% to reach levels that neither stimulates nor cools growth.
In the end, a renewed yen decline could be the next decisive nudge towards further rate hikes, some analysts say.
Although the BOJ is guaranteed by law independence from government interference, it has historically been sensitive to political developments. Its massive stimulus in 2013 was deployed after intense pressure from then premier Shinzo Abe to reverse a strong yen and beat deflation.
The BOJ's exit from ultra-loose policy last year came after a flurry of calls from politicians to help stem sharp yen falls that were pushing up import costs.
"For the BOJ, the biggest concern is how the election could change the government's focus on economic policy, and how markets could react," said a source familiar with its thinking.
Veteran BOJ watcher Mari Iwashita sees the chance of a rate hike in October if the yen, now around 147 to the dollar, falls below 150 and puts upward pressure on prices.
"Sustained yen weakness would push up underlying inflation, so could be a key trigger for policy action," said Iwashita, who is executive rates strategist at Nomura Securities.
($1 = 147.4300 yen)
Hashtags

Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles


Reuters
28 minutes ago
- Reuters
Samsung Elec signs $16.5 billion deal to make chips for global firm
SEOUL, July 28 (Reuters) - Samsung Electronics ( opens new tab said on Monday it has signed a $16.5 billion deal to supply chips for an unidentified major global company, sending its shares up 3.5%. The South Korean tech giant said the deal signed on Saturday was for contract chip manufacturing and details of the agreement including the counterpart and terms would not be disclosed until the contract is completed at the end of 2033. The deal comes as Samsung is struggling to compete in the race to make artificial intelligence chips, which has hit its profits and share price. Samsung has customers like Tesla (TSLA.O), opens new tab and Qualcomm (QCOM.O), opens new tab for its foundry business, while bigger rival TSMC has customers like Apple (AAPL.O), opens new tab and Nvidia (NVDA.O), opens new tab. The deal comes as South Korea is seeking U.S. partnerships in chips and shipbuilding as it is making last-ditch efforts to reach a trade deal to eliminate or cut potential 25% U.S. tariffs. It is not clear how the order would affect Samsung's plan to start production at its new factory in Texas, which has been delayed as it had struggled to win major customers. Samsung is grappling to boost production yields of its latest 2-nanometer technology, and the order is unlikely to involve the cutting-edge tech, Lee Min-hee, an analyst at BNK Investment & Securities, said. Samsung has been losing market share to TSMC in contract manufacturing, underscoring technological challenges the firm faces in mastering advanced chip manufacturing to lure the likes of Apple and Nvidia away from TSMC, analysts said. ($1 = 1,383.6800 won)


Reuters
28 minutes ago
- Reuters
Stocks cheer the art of Trump's trade deals after EU agreement
SINGAPORE, July 28 (Reuters) - Global stocks rose and the euro firmed on Monday after a tradeagreement between the United States and the EU lifted sentiment and provided clarity in a pivotal week headlined by the Federal Reserve and the Bank of Japan policy meetings. The U.S. struck a framework trade agreement with the European Union, imposing a 15% import tariff on most EU goods - half the threatened rate, a week after agreeing to a trade deal with Japan that lowered tariffs on auto imports. Countries are scrambling to finalise trade deals ahead of the August 1 deadline, with talks between the U.S. and China set for Monday in Stockholm amid expectation of another 90-day extension to the truce between the top two economies. "A 15% tariff on European goods, forced purchases of U.S. energy and military equipment and zero tariff retaliation by Europe, that's not negotiation, that's the art of the deal," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities. "A big win for the U.S." S&P 500 futures rose 0.4% and the Nasdaq futures gained 0.5% while the euro firmed across the board, rising against the dollar, sterling and yen. European futures surged nearly 1%. In Asia, Japan's Nikkei slipped after touching a one-year high last week while MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS), opens new tab was up 0.27%, just shy of the almost four-year high it touched last week. While the baseline 15% tariff will still be seen by many in Europe as too high, compared with Europe's initial hopes to secure a zero-for-zero tariff deal, it is better than the threatened 30% rate. The deal with the EU provides clarity to companies and averts a bigger trade war between the two allies that account for almost a third of global trade. "Putting it all together, what we've seen with Japan, with the EU, with the talks which are due to be held in Stockholm between the U.S. and China, it really does negate the risk of a prolonged trade war," said Tony Sycamore, market analyst at IG. "The importance of the August tariff deadline has significantly been diffused." The Australian dollar , often seen as a proxy for risk sentiment, was 0.12% higher at $0.65725 in early trading, hovering around the near eight-month peak scaled last week. In an action-packed week, investors will watch out for the monetary policy meetings from the Fed and the BOJ as well as the monthly U.S. employment report and earnings reports from megacap companies Apple (AAPL.O), opens new tab, Microsoft (MSFT.O), opens new tab and Amazon (AMZN.O), opens new tab. While the Fed and the BOJ are expected to stand pat on rates, comments from the officials will be crucial for investors to gauge the interest rate path. The trade deal with Japan has opened the door for the BOJ to raise rates again this year. Meanwhile, the Fed is likely to be cautious on any rate cuts as officials seek more data to determine if tariffs are worsening inflation before they ease rates further. But tensions between the White House and the central bank over monetary policy have heightened, with Trump repeatedly denouncing Fed Chair Jerome Powell for not cutting rates. Two of the Fed Board's Trump appointees have articulated reasons for supporting a rate cut this month. ING economists expect December to be the likely starting point for rate cuts, but it "may be a 50 basis point cut, if the evidence on weaker jobs and GDP growth becomes more apparent as we anticipate." "This would be a similar playbook to the Federal Reserve's actions in 2024, where it waited until it was completely comfortable to commit to a lower interest rate environment," they said in a note.


Reuters
28 minutes ago
- Reuters
Euro rises after US, EU agree to tariff deal
TOKYO, July 28 (Reuters) - The euro gained on Monday following the announcement of a framework trade agreement between the United States and the European Union, the latest in a flurry of deals to avert a global trade war. Meeting in Scotland on Sunday, U.S. President Donald Trump and European Commission President Ursula von der Leyen announced the deal, which will result in a 15% tariff on EU goods, half what Trump had threatened to impose from August 1. Senior U.S. and Chinese negotiators are due to meet in Stockholm on Monday with an aim to extend a trade truce and prevent steep tariff hikes. Meanwhile, investor attention is shifting towards corporate earnings and central bank meetings in the U.S. and Japan. "It could be a positive week, just purely from the fact that now we know the rules of the game, if you like," said Rodrigo Catril, senior currency strategist at National Australia Bank. "Now that there is more clarity, you would think that not only in the U.S., but around the globe, there will be a little bit more willingness to look at investment, to look at expansions, and to look at where the opportunities are," he said on a NAB podcast. The euro stood at $1.1763 , up 0.2% so far in Asia. The common currency rose 0.2% to 173.78 yen . Trump said the EU plans to invest some $600 billion in the U.S. and dramatically increase its purchases of American energy and military equipment. The pact is similar to one forged with Tokyo negotiators last week that will see Japan investing some $550 billion in the U.S. and a 15% tariff imposed on its cars and other imports. The baseline 15% tariff will still be seen by many in Europe as too high, compared with Europe's initial hopes to secure a zero-for-zero tariff deal. China is facing an August 12 deadline to reach a durable trade pact with the U.S. No breakthrough is expected in the U.S. and China talks in Stockholm, but analysts said another 90-day extension of a trade truce struck in mid-May was likely. The U.S. dollar advanced on Friday, bolstered by solid economic data that suggested the Federal Reserve could take its time in resuming interest rate cuts. Both the Fed and the Bank of Japan are expected to hold rates steady at this week's policy meetings, but traders are focusing on the subsequent comments to gauge the timing of the next moves. The dollar was little changed at 147.68 yen . The dollar index , which tracks the greenback against major peers, fell 0.1% to 97.534. Sterling traded at $1.34385 , down almost 0.1%. The Australian dollar fetched $0.6576 , up 0.2%, while New Zealand's kiwi dollar was flat at $0.6019 .