Ishiba’s departure gives Bank of Japan pause for thought on rate hikes

The appointment of a new Japanese prime minister next month could give the central bank more reasons to go slow on its next interest rate hike, especially if the next leader is wary of seeing borrowing costs rise too quickly.

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While the Bank of Japan’s (BoJ) main concern remains domestic inflation and the economic hit from US tariffs, uncertainty around who becomes next leader or what their policies might be adds a layer of risk to deliberations around monetary settings.

Prime Minister Shigeru Ishiba announced his decision to resign on Sunday after a string of election defeats including a July upper house poll. The focus has now shifted to who will replace him.

Japanese bond yields fell on Tuesday on reports Sanae Takaichi, a proponent of government stimulus and monetary easing, would run in the Liberal Democratic Party’s leadership race in October, which could make her the next prime minister.

“The resignation of Japan’s prime minister Ishiba and the unfolding leadership contest at the ruling LDP will likely deter the Bank of Japan from raising rates in October,” analysts at Evercore ISI wrote in a research note, adding they were pushing back their call for the next hike provisionally to January.

The departure of Ishiba, seen as a fiscal hawk who gave a nod to gradual BoJ rate hikes, pushed down the yen and bond yields as investors reduced bets of a near-term rate hike. Money markets now show about a 20% chance the BoJ will hike rates by the end of October, down from 46% odds a week ago.