Kishida's exit stirs political uncertainty, casting shadows on BOJ’s delicate rate hike strategy

Japan’s Prime Minister Fumio Kishida's resignation is more likely to cause a hiccup in the Bank of Japan's plan to steadily lift interest rates from near zero.

Then there could be some acceptance of pause for a considerable period: not only in the way the leadership race of the ruling party shapes up but also in the way market moves become key in the political debate on the favoured pace of rate hikes, analysts say.

Kishida, who handpicked Kazuo Ueda as BOJ governor last year, said on Wednesday he will not stand in his ruling Liberal Democratic Party's (LDP) leadership race in September.

The BOJ worked in tandem with Kishida's administration to preach the benefits of higher wages. Days before the BOJ's rate hike in July, Kishida said his backing toward an exit from ultra-low interest rates signified a policy normalisation that would support Japan's shift to a growth-driven economy.

Kishida's exit creates a political vacuum at a high level of uncertainty over economic policy and complicates BOJ's efforts to pull off a smooth exit from easy monetary conditions in coordination with the government.

Most assumed front-runners have backed the policy, which includes only very gradual increases in Japan's current ultralow interest rates, mainly as a means to keep sharp falls in the yen at bay.

Shigeru Ishiba, viewed as one of the frontrunners to take over from Kishida as the next LDP leader and therefore premier, would not comment directly but said the BOJ was "on the right policy track" in raising rates slowly, according to Reuters.

Other contenders, such as party heavyweights Toshimitsu Motegi and Taro Kono, have also repeatedly spoken of the need for higher interest rates and hawkish communication by the BOJ.

The only candidate urging aggressive easing is dark horse Sanae Takaichi, who belongs to a party group that supported former premier Shinzo Abe's stimulus policies.

"Takaichi might be an exception, but most candidates don't seem to be against the BOJ's policy normalisation. If so, there won't be much disruption to the bank's long-term rate hike path," said veteran BOJ watcherMariIwashita.