By Leika Kihara

TOKYO, Reuters – The Bank of Japan is becoming increasingly isolated within a global community of hawkish central banks due to a rapid fall in the yen as well as market distortions.

Opinion lawmakers have been questioning the BOJ about their currency weakness and pushing up living costs. Prime Minister Fumio Koshida is in hot water in the lead-up to the July upper house elections.

Kishida defended BOJ policy because it was necessary for maintaining a persistently low economy. However, new scrutiny could affect government deliberations on Haruhikokuroda’s successor as dovish governor.

In the process of selecting the next head of the central banking institution, it may be important to consider whether ultra-low rates are possible given Japan’s weak yen.

Since 1990, the BOJ has kept rates at zero. This is despite rising raw material costs. “It’s high time that the BOJ changes its weak-yen strategy,” Akio Fukuda, an opposition lawmaker told Masayoshi Aamiya, deputy governor – who was seen as a solid candidate to succeed Kuroda in parliament Tuesday.

Although the appointment of the governor is usually closely followed, the current economic crisis and increased focus on BOJ’s unconventional monetary policy means that the process is getting more attention.

Hiroshi Nakaso was also a former BOJ deputy governor and is widely considered a front-runner for the next governor. He described Shinzo Abe’s Abenomics policies as being too dependent on radical monetary stimulation.

While a rate increase is unlikely anytime soon, it’s clear that the BOJ will be under increasing pressure to prepare a plan in the event of a change in public mood.

People will become more annoyed by the rising price of goods if the yen drops. Nobuyasu Atago is a former BOJ official and chief economist at Ichiyoshi Securities.

If the yen drops too far, there’s a possibility that the BOJ will fine-tune the yield curve control.

CHALLENGES FOR COMMUNICATION

Due to the possibility of U.S. rate rises aggressively, the yen fell to two-decades lows. These rates contrast sharply with the BOJ’s commitment to hold short-term rates below 0.1% and to preserve the yield on the 10-year under its yield curve control policy (YCC).

Kuroda argued for low interest rates, pointing out that Japan’s inflation is still much lower than the West’s.

The difficulty of advocating low rates could be exacerbated by signs that the European Central Bank (long a friend dove among global central bankers) will stop imposing negative rates.

People are feeling the pinch. A BOJ survey last month showed that households are more likely to expect prices to increase in the next year than they were three months ago.

A Reuters survey found that more than 60% Japanese businesses want the BOJ’s ultra-easy policy to be ended this fiscal year because of the weakness in the yen.

Investors are also critiquing the BOJ for its increased efforts to defend its 10-year rate caps.

Some analysts believe the disconnect between public concerns about the weakening of the yen and BOJ’s determination to keep ultra-easy policies could damage the bank’s credibility as well as increase the difficulty in communicating policy intentions.

Naomi Muguruma is a senior market analyst at Mitsubishi UFJ. Morgan Stanley (NYSE:) Securities.

If the BOJ’s statements are not resonant with the markets or the public, then monetary policies won’t be successful.”