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Bank of Japan Stimulus to Roll On Whoever Wins Japan Elections, Momma Says

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(Bloomberg) -- The Bank of Japan will keep pumping out stimulus regardless of any shift in the nation’s political leadership as a result of upcoming elections or any Federal Reserve tapering moves, according to a former senior executive at the central bank.

“You want to keep letting sleeping dogs lie,” said Kazuo Momma in an interview, referring to the monetary policy stance of Prime Minister Yoshihide Suga and the candidates competing with him in a ruling party leadership contest in September.

“You would be risking a big market reaction by touching monetary policy. So it won’t be a topic of discussion whoever takes the helm,” the former head of monetary policy at the central bank said.

Suga is set to fight for his leadership on Sept. 29, with a general election also to take place before the end of fall. While the premier is currently expected to win re-election, helped by the internal dynamics of the ruling party, his low approval ratings are feeding concern over the stability of his leadership and the outcome of the national election.

Investors could react badly if he loses and the country returns to a period of frequent leadership changes and incoherent economic policies.

Regardless of the outcome, one thing market participants can count on is BOJ Governor Haruhiko Kuroda sticking with stimulus, said Momma, who left the bank in 2016.

Prices have fallen in Japan for 12 straight months in contrast to other economies, so any new leader would want the BOJ to continue its efforts, but without the need for extra government help, he said. A second year of falling prices has been used in the past in Japan as a yardstick for declaring deflation.

“The BOJ has already done everything it can,” said Momma. “So coming up with a deflation policy would likely end up becoming a call for more fiscal support, so that’s why the government has nothing to gain by characterizing the current situation as deflation.”

With the Fed signaling the start of tapering this year, Japan’s continued easing is likely to keep pressure on the yen to stay weak against the dollar, Momma said. Markets haven’t been ruffled by the prospect of U.S. tapering so far thanks to the Fed’s careful communication, he added.

The outside risk is that the currency could still rise toward the end of the year if stocks get spooked by spreading Covid infections that hit the U.S. economy or if geopolitical developments such as those in Afghanistan trigger risk aversion in markets, Momma said.

“If that becomes the case, the BOJ could step up its purchases of exchange-traded funds,” said Momma. If markets continued to fall the BOJ could consider consider cutting negative interest rates further, taking advantage of new support measures for banks it introduced at its March review, he added.

“The yen is the biggest risk for them.”

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