Here are some details on how the outcome of the LDP leadership election, to be held on Sept. 27, could affect the timing and pace of the Bank of Japan's (BOJ) future interest rate hikes.
WHO ARE THE FRONT-RUNNERS?
WHAT ARE THEIR VIEWS ON MONETARY POLICY?
Most candidates, including Ishiba and Koizumi, appear to endorse the idea of interest rates rising gradually.
Koizumi said he would respect the BOJ's independence in setting monetary policy. Ishiba has said the BOJ was on the "right policy track" by ending negative interest rates, though he recently said Japan must prioritise making a full exit from deflation.
The most vocal opponent of policy normalisation is Takaichi, who said the BOJ hiked rates too early, and that borrowing costs must be kept low to avoid hurting consumer sentiment.
HOW COULD THE RACE OUTCOME AFFECT BOJ POLICY, MARKETS?
The BOJ may be forced to delay the timing of rate hikes if Takaichi becomes prime minister, or takes up key posts such as finance minister, given her preference of low borrowing costs.
A Takaichi victory could therefore push down bond yields and weaken the yen - an unwelcome prospect for policymakers eager to have markets in tune with its plans to exit loose monetary conditions. However, bond yields may rise in the longer run if she vows to compile a big spending package that could lead to increased debt issuance.
Takaichi has called for "strategic" spending without offering details. Koizumi also pledged emergency payouts to small firms and low-income households hit by rising living costs. Neither has elaborated on the size of spending, or how it will be funded. Known as a fiscal hawk, Ishiba has called for getting Japan's fiscal house in order.
HOW WOULD THE POLITICAL CALENDAR AFFECT BOJ POLICY?
The winner of the Liberal Democratic Party's (LDP) leadership race is set to become next prime minister due to the party's dominance in parliament, and is likely to call a snap election that could be held as early as Oct. 27.
The BOJ may prefer to avoid drawing unwanted political attention by hiking rates around the time of the election, which means policymakers may wait at least until December to hike rates again.
After the Sept. 19-20 meeting, the BOJ next holds a policy review on Oct. 30-31 when it will also issue fresh quarterly growth and price estimates.
A majority of economists polled by Reuters expect the BOJ to raise rates again this year, following its surprise July hike, with more than three-quarters of them betting on a hike at the Dec. 18-19 meeting.
