With Sanae Takaichi set to become Japan's prime minister, advancing expansionist economic policies, chances have risen that the central bank will avoid raising interest rates this month, though the pause may not last if it batters the yen.
Takaichi, likely to become Japan's first female leader next week after winning the presidency of the ruling party on Saturday, stood out in the race as the only proponent of big spending and loose monetary policy.
Parliament is expected to vote the conservative nationalist in as premier on October 15 since her Liberal Democratic Party is the largest in parliament, though this is not assured as the LDP's coalition lost its majorities in both houses under her predecessor, Shigeru Ishiba.
NEW LEADER COMPLICATES BOJ RATE HIKES
Upon winning the race, Takaichi made clear the government will take the lead in setting fiscal and monetary policy - and that her priority would be to reflate demand and the broader economy.
Describing recent price rises as driven by higher raw-material costs, Takaichi warned it was premature to declare victory over deflation as companies start to feel the pain from President Donald Trump's U.S. tariffs.
"What would be best would be to achieve demand-driven inflation, where wages would rise and drive up demand, which in turn causes moderate price rises that boost corporate profits," she told a press conference after her victory.
Her ascension makes it more likely the Bank of Japan will refrain from raising rates on October 30, analysts say.
"Takaichi is not seen as supportive of interest rate hikes, which could make it more difficult for the BOJ to proceed with tightening," said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.
"While rate hikes may not be ruled out entirely, the central bank could adopt a more cautious and gradual approach," he said, adding the next increase may be delayed until early next year.
Some analysts, however, doubt whether Takaichi will push back too hard against the BOJ's plan for slow, moderate tightening as inflation - rather than Japan's long-time curse of deflation - is now the bigger economic problem, costing Ishiba's LDP a huge election loss in July.
The BOJ ended decades of massive stimulus last year, raising its policy rate to 0.5% in January on the view Japan was on the cusp of durably achieving its 2% inflation target.
Before Takaichi's victory, markets were pricing in more than a 60% probability of a rate hike this month, with inflation above target for more than three years, a hawkish board split at the September policy meeting and calls for a near-term rate hike by a dovish policymaker.
But Governor Kazuo Ueda kept markets guessing last week, warning of global uncertainties that could discourage firms from raising wages.
"Ueda appeared to be in no rush hiking interest rates anyway. Takaichi's win will make it even more likely the BOJ will take a wait-and-see mode and hold off raising rates in October," said Mari Iwashita, executive rates strategist at Nomura Securities.
At the same time, former central bank official Nobuyasu Atago said, "The BOJ faces a new challenge of creating a channel of trust and communication with Takaichi's administration, which might take some time."
'THINGS HAVE CHANGED' SINCE ABE
Takaichi has been a vocal advocate of "Abenomics", a hefty mix of government spending and monetary stimulus deployed by her mentor, then-premier Shinzo Abe, to pull Japan out of deflation and ease the pain of a surging yen on the export-reliant economy.
Although she has toned down comments such as calling last year's rate hike "stupid", Takaichi has retained ties with reflationist-minded lawmakers and economists who advise her on policy.
Her stance contrasts with that of Ishiba and his predecessor Fumio Kishida, who nodded to the BOJ's efforts to roll back stimulus as accelerating food inflation - partly caused by higher import costs from a weak yen - hit households.
With markets fully pricing in another rate increase by early next year, delaying a hike for too long could unleash sharp yen falls that would boost import prices, exacerbating inflation.
Some investors expect Takaichi's win to push the dollar, now around 147 yen, above 150 yen - a level of yen weakness that drew verbal warnings from Japanese authorities in the past.
"Given her reflationist streak, there's a chance Takaichi could meddle in monetary policy," said former BOJ board member Takahide Kiuchi, who expects no rate hike this month. "But I don't think her administration would force the BOJ to overhaul its rate-hike plans altogether, unless the U.S. economy weakens significantly."
Diplomatic considerations could also affect Takaichi's stance on monetary policy, some analysts say.
The Trump administration, which favours a weaker dollar to boost U.S. exports, has signalled displeasure over the yen's softness, with Treasury Secretary Scott Bessent saying in August the BOJ was "behind the curve" in tackling inflation.
Trump is expected to visit Japan this month, with some media reporting he could arrive days before the BOJ's October 29-30 meeting.
"In the past the yen was strong, so low interest rates were acceptable. Now that higher inflation is causing difficulties, it's probably harder for Takaichi to criticise monetary policy as much as before," said Tomohisa Ishikawa, chief economist at Japan Research Institute.
"Things have changed from when Takaichi used to work together with Abe."
