Japan's incoming PM Ishiba gives BOJ scope to hike rates - with caution

By Leika Kihara and Makiko Yamazaki

TOKYO (Reuters) -Japan's incoming prime minister Shigeru Ishiba said on Friday the country's monetary policy will broadly remain loose, but he signalled that he won't push back against further increases in still near-zero interest rates.

"We'll deploy fiscal stimulus if necessary. There also won't be any change to Japan's loose monetary-policy trend," Ishiba told a television programme.

"It's something the Bank of Japan, which is obliged to achieve price stability, must decide," Ishiba said when asked about the chance of further rate hikes by the central bank.

Ishiba said he would not make any specific request to the BOJ, adding that he would not push back against the central bank's efforts to phase out stimulus as long as they were done carefully.

The remarks came after Ishiba won Friday's ruling party's leadership race, which de-facto makes him next prime minister due to the party's dominance in parliament.

The BOJ ended negative interest rates in March and raised short-term borrowing costs to 0.25% in a landmark shift away from a decade-long, radical stimulus programme.

The yen bounced on Friday, recovering earlier losses, after Ishiba, a former defence minister seen as a critic of past aggressive monetary stimulus, won the ruling Liberal Democratic Party's leadership contest.

He beat Sanae Takaichi, a vocal proponent of deceased former premier Shinzo Abe's "Abenomics" stimulus policies, in the final run-off.

Parliament is set to choose Ishiba as new premier on Tuesday, after which he will form a new cabinet the same day.

In a news conference earlier on Friday, Ishiba stressed the need for the country's economy to "fully emerge from deflation" and vowed to accelerate Prime Minister Fumio Kishida's policies aimed at boosting household income through wage hikes.

Revitalising consumption was key for Japan to emerge from economic stagnation, he said, adding the new administration must consider the most effective means to cushion the blow to households from rising inflation.

"Japan's gross domestic product has been flat in the past two decades," with wage growth yet to exceed inflation, Ishiba said. "Unless consumption increases, the economy won't do well."

The remarks suggest Ishiba will carry over many of the economic policies pursued by Kishida, who focused on measures to boost wages and endorsed the BOJ's exit from massive stimulus.

Analysts saw Ishiba's win as removing one road-block for the BOJ in raising interest rates further.

"Ishiba's win would give the BOJ a freer hand as Ishiba, who doesn't appear to have a very strong view on monetary policy, will likely respect the central bank's decisions," said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.

"With today's result, the influence of Abenomics will essentially disappear," Maeda said, predicting the next interest rate hike would come as early as December.

Takeshi Minami, chief economist at Norinchukin Research Institute, also said the victory of Ishiba would make it easier for the BOJ to normalise monetary policy.

"In terms of economic policy, Japan is bidding farewell to Abenomics," he said.

Ishiba is likely to announce a plan to compile a fresh stimulus package focusing on steps to curb food and fuel prices, which will be funded by a supplementary budget.

BOJ Governor Kazuo Ueda has said the central bank will keep raising rates if inflation remains on track to stably hit 2% as it projects, though he stressed the bank will spend time gauging how global economic uncertainties affect Japan's fragile recovery.

(Reporting by Makiko Yamazaki and Leika Kihara; additional reporting by Tetsushi Kajimoto; Editing by Christina Fincher, Kim Coghill and Hugh Lawson)