Prime Minister Shigeru Ishiba’s resignation could worsen political turmoil in Japan and tie the hands of the Bank of Japan on rate increases, according to analysts.

“I think hurdles for a rate hike got higher,” said Tsuyoshi Ueno, an economist at NLI Research Institute.

 

According to a Bloomberg survey of 50 analysts conducted Sept. 3 to Sept. 10., October was the most popular choice for the next rate increase, with 36% of respondents forecasting one that month.

That's down from 42% in the previous survey, which was conducted before Ishiba announced on Sunday his intention to step down.

Ueno argues that increasing the policy rate – currently set at 0.5% – in October would have been difficult even prior to Ishiba’s announcement, but not it is even less likely due to the political situation.

The Liberal Democratic Party will hold a presidential election on Oct. 4 to pick Ishiba's successor. The LDP's new president will likely become prime minister about a week later.

With that schedule, the BOJ will not have enough time for the market to fully price in the choice ahead of its policy meeting on Oct. 29 and 30, Ueno said.

“The unstable political situation makes it tough for the BOJ to manage its policy, so I think the bank will maintain its wait-and-see stance,” he added.