(Bloomberg) -- A political shakeup stemming from a slush-fund scandal may smooth the path for the Bank of Japan to end its negative-rate regime, according to central bank watchers.
Japanese Prime Minister Fumio Kishida is reportedly set to remove from his administration all officials affiliated with a political faction known for its dovish stance on monetary policy, which would make it easier for the central bank to start raising interest rates, according to economists. The faction was formerly led by the late premier Shinzo Abe, who had tried to beat years of deflation with aggressive monetary easing and large fiscal spending.
“I see a decline in power of the Abe faction giving the BOJ more leeway and making it easier to go ahead with policy adjustments such as ending the negative interest rate,” Takahide Kiuchi, economist at Nomura Research Institute Ltd. and a former BOJ board member, wrote in a research note on Sunday.
That view is shared by Mari Iwashita, chief market economist at Daiwa Securities Co.
“If the matter is contained by a cabinet reshuffle and doesn’t lead to a snap election, the BOJ can move in January” to end the negative rate, Iwashita said, adding that the bank is likely to give some kind of signal at the end of its next policy board meeting on Dec. 19.
The political instability comes as Japan’s economy loses momentum with sluggish demand overseas weighing on exports and sticky inflation limiting domestic demand. Aside from politics, economics is likely to have a bigger impact on the BOJ’s decision, said Masamichi Adachi, chief Japan economist at UBS Securities Japan, and a former BOJ official.
“If the U.S. starts cutting interest rates aggressively, that will add upward pressure on the yen and have a negative impact on the Japanese economy,” Adachi said. “That would make it hard for the BOJ to move.”
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