BOJ Expected To Raise Rates To 1.5% by July, Predicts Ex-Policymaker

TOKYO: The Bank of Japan will likely raise interest rates again around June or July and seek to triple its policy rate to at least 1.5 per cent in the next two years, former BOJ board member Makoto Sakurai said on Tuesday. Broadening wage hikes, prospects of sustained price rises and Japan's solid economic growth give the central bank scope to continue raising interest rates steadily, said Sakurai, who retains close contact with incumbent policymakers. The BOJ raised short-term interest rates to 0.5 per cent from 0.25 per cent last week despite lingering uncertainty over the economic fallout from U.S. President Donald Trump's policies. 

"The BOJ will seize any opportunity to raise interest rates without much delay. That's the impression I got looking at how the BOJ hiked in January instead of waiting until March," Sakurai told Reuters.

There is even a chance the BOJ could push forward the timing of its next rate hike to April before domestic political uncertainty heightens ahead of an upper house election likely to be held in July, he said. 

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Sakurai noted that if the economy moves in line with forecast, the BOJ will probably raise rates to 0.75 per cent around June or July. But, the timing could be swayed by domestic politics, with Prime Minister Shigeru Ishiba's minority coalition suffering from a weak political standing and low approval ratings. The BOJ next meets for a policy meeting on March 18-19, followed by one from April 30 to May 1, when it will issue fresh quarterly growth and inflation forecasts. The BOJ last year made a landmark exit from a decade-long stimulus and raised short-term rates to 0.25 per cent on the view Japan was on the cusp of sustainably achieving its 2 per cent inflation goal. It raised rates again on Friday to 0.5 per cent, a level unseen in Japan since the 2008 global financial crisis, in a sign of its conviction that wage and price increases will broaden.

BOJ Eyes Rate Hike to 1.5% Amid Economic Recovery and Inflation Surge

Governor Kazuo Ueda said the central bank will keep raising rates if the economy continues to recover, though offered few clues on the timing and pace of future rate hikes. By the end of fiscal 2026, BOJ executives probably want to raise short-term rates to at least 1.5 per cent so they have scope to reduce borrowing costs when the economy faces another downturn, Sakurai said. 

BOJ rate hike expected by mid-2023.

"While Japan's nominal neutral rate could be somewhat higher, a hike to 1.5 per cent would allow the BOJ to argue it is still supporting a fragile economy with some degree of accommodation," he said and added, "If markets turn volatile or Japan's economic uncertainty heightens, the BOJ could put off hiking. Otherwise, it is likely to raise rates about twice a year in the coming two years."

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BOJ staff has produced estimates showing Japan's nominal neutral rate to be in a range of 1 per cent-2.5 per cent. Ueda has said the neutral rate was too hard to pin down in real-time, though many analysts see the neutral rate as somewhere around 1 per cent. Sakurai said the BOJ executives probably see Japan's neutral rate as being somewhere around 1.5 per cent-2.0 per cent. A hike in rates to 1.5 per cent would push the BOJ's policy target to levels unseen since 1995. Back then, the central bank was using the official discount rate (ODR) as its main policy target rather than the overnight call rate it currently uses. Japan's core consumer inflation hit 3.0 per cent in December, marking the fastest annual pace in 16 months. It has exceeded the BOJ's 2 per cent target for nearly three years, heightening the case for the central bank to raise still-low borrowing costs.