LDP attempts to reassert control over Japanese monetary policy

This week, Japan witnessed a feud with potentially far-reaching implications, as the Bank of Japan argued with LDP politicians over who has control of Japanese monetary policy. The spat began, when the Bank of Japan hinted publicly that it would like to reassert its independence in matters of monetary policy and hike interest rates. The announcement worried Japanese politicians for a couple of reasons. First, the popularity of the ruling LDP is closely tied to the performance of Japan’s economy; accordingly, LDP politicians want to be certain the economy is on solid footing before they adjust interest rates. Second, Japan has run massive fiscal deficits in recent years, and higher interest rates would raise the government’s cost of borrowing. Yen bulls should monitor this situation closely, for a hike in Japanese interest rates could provide an impetus for the Yen to reverse its systemic decline.

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