Prime Minister Shinzo Abe’s decision to call a snap election for Oct. 22 has clouded the outlook for Bank of Japan Gov. Haruhiko Kuroda and one of the world’s most radical monetary policy regimes.
While the ruling Liberal Democratic Party is expected to attract the most votes, even a significant loss of seats in the Diet could weaken Abe’s hand, lowering the chances that Kuroda will be reappointed when his current term ends in April.
“If Abe suffers a considerable loss, those politicians emerging with greater power would want a new face as evidence of change,” said Masamichi Adachi, a senior economist at JPMorgan Chase and a former BOJ official, referring to the next central bank governor.
While Kuroda is already 72 and his reappointment to a second full term would break precedent, he was considered the front-runner to head the central bank for another five years in a survey of analysts in late August. In a televised interview last month, Abe said he gave Kuroda’s work a high rating, but said it was too early to discuss who might lead the institution in the years ahead.
The election has added to the uncertainty about the BOJ’s future leadership, which is more than four years into a radical monetary easing program meant to generate 2 percent inflation and economic growth. Amid growing concern about the program’s side effects, and with the inflation goal still far away, some lawmakers have pressed Kuroda to discuss how he plans to unwind the easing.
A poor election showing by Abe’s LDP could also weaken the prospects of other potential candidates seen as close to the prime minister, including his longtime friend Etsuro Honda.
When Abe called the poll, his approval ratings had rebounded after a series of cronyism scandals. They have since sagged again, and the entrance of popular Tokyo Gov. Yuriko Koike’s Kibo no To (Party of Hope) into the race poses an added risk to the LDP-led coalition’s continued dominance of the Diet. While recent polls show the LDP remains the favorite, Koike crushed the LDP in a Tokyo assembly election in July, just after defecting from the ruling party.
Abe’s decision to gamble on an election a year before necessary could result in a challenge to his leadership of the party — and therefore his premiership — if the LDP loses many seats.
“If Abe’s government loses a majority, it’s simple that Kuroda will be very unlikely to have a second term,” said Tetsufumi Yamakawa, head of Japan research at Barclays PLC and a former BOJ official. “If Abe loses, say, 30 seats, that can be seen as a victory for him. Claiming victory gets difficult if he loses 40 or 50 seats.”
According to a poll conducted by public broadcaster NHK from Oct. 7 to 9, about 39 percent of respondents didn’t support any party. About 31 percent supported Abe’s LDP while Kibo no To was ranked second with 4.8 percent.
Even if Abe remains as prime minister, a major blow on election day could shake up the pool for other candidates for BOJ governor, said Masaaki Kanno, chief economist at Sony Financial Holdings.
According to Kanno, among those who could see their chances of becoming central bank chief decline are Honda, as well as BOJ Deputy Governor Hiroshi Nakaso and Nobuchika Mori, the commissioner of the Financial Services Agency, both of whom are said to be close to Chief Cabinet Secretary Yoshihide Suga.
In the Bloomberg survey, analysts ranked Nakaso as the second-highest contender for the governorship, followed by Takatoshi Ito, a Columbia University professor. Honda, currently ambassador to Switzerland, BOJ Executive Director Masayoshi Amamiya and Mori were also named as likely candidates.
Last week, Koike’s party released a policy manifesto that signaled the need for eventual change at the central bank, though it didn’t mention Kuroda or the need for new leadership. In an interview, Koike indicated Abe’s growth strategy had relied too much on monetary and fiscal policy, but said a sudden change in BOJ policy wouldn’t be desirable.
“Rather than relying on BOJ policy and fiscal stimulus, it would be healthier to invigorate private sector companies, which are the essential part of the Japanese economy,” she said.
A weakening of Abe could embolden opposition lawmakers to push harder for the BOJ to begin normalizing its unprecedented monetary policy, said Yamakawa of Barclays.
“There is a growing sense of stepping back from the BOJ among politicians,” Yamakawa said. “It used to be that pushing the BOJ was a popular thing to do but now with massive stimulus in place, Japanese households are starting to wonder if the BOJ is doing the right thing and that sentiment is reverberating among politicians. Targeting 2 percent inflation isn’t really popular, especially among older people.”
So far markets have taken Abe’s up-and-down poll numbers and the electoral challenge in stride. But that could certainly change, according to Rabobank International, given surprising election results in the U.S. and UK over the past year.
“Financial markets have generally proved sanguine in the face of political risks, but should Abe have a ‘Theresa May experience,’ one cannot rule out a more significant market reaction,” Bjorn Giesbergen, an economist at the Rabobank, wrote in a report on Oct. 4.