Hawkish BOJ Policymaker Urges Raising Rates To At Least 1%

TOKYO: Naoki Tamura, a hawkish member of the board, stated on Thursday that the Bank of Japan needs to increase interest rates to a minimum of 1 per cent by the latter half of the fiscal year starting in April, comments that strengthened the yen as they boosted expectations of an imminent rate hike. Inflationary threats were escalating as businesses persisted in transferring increasing costs of raw materials and labour, necessitating an increase in the BOJ's policy interest rate to levels considered neutral for the economy, he stated. Tamura stated that he considers Japan's neutral rate to be a minimum of 1 per cent, noting that rates should attain that level by the latter part of fiscal 2025 when the results of annual wage talks are expected to confirm widespread pay hikes, including for small companies. Tamura stated in a speech that if short-term interest rates remain under the neutral interest rate, inflation will continue to rise.

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BOJ board member urges 1% rate increase

The dollar momentarily dropped to a two-month low of 151.81 yen following Tamura's comments, as markets kept factoring in the likelihood of a rate increase soon. The yield on the two-year Japanese government bond (JGB) reached 0.765 per cent, marking the highest point since October 2008. Markets are estimating about a 50 per cent likelihood of an additional rate increase in July. Tamura, a past commercial banker regarded as the board's most hawkish member, stated that inflation expectations for businesses and households have probably hit 2 per cent already. However, he stated that the BOJ should schedule its rate increases meticulously without any preconceived notions due to the possible effects on the Japanese population, which has long endured extremely low rates. "Considering that short-term interest rates are expected to be at 1% by the latter part of fiscal 2025, I believe the Bank should raise rates gradually and in a timely fashion, due to the growing chance of reaching its price goal," he stated.

BOJ Signals Gradual Shift from Ultra-Loose Monetary Policy

Tamura stated that the central bank needs to evaluate how the economy and prices react to every increase in rates without making any specific remarks about when the BOJ might tighten policy once more. "Even if the policy rate rises to 0.75 per cent, real interest rates would still be considerably negative," he stated, emphasizing that there would be "still a long way to go" to achieve a rate that would slow growth. "In other words, it's time for the Bank to gently reduce its intense focus on monetary easing, enabling it to decelerate when needed without applying a sudden halt," Tamura stated. Last month, the BOJ increased interest rates to 0.5 per cent, the highest level since the 2008 global financial crisis, demonstrating its belief that Japan is all set to sustainably reach its 2 per cent inflation goal. BOJ Governor Kazuo Ueda has indicated his willingness to maintain rate hikes if ongoing wage increases support consumption and enable companies to keep increasing prices. However, he has avoided mentioning the precise level of Japan's neutral rate.

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Tamura's comments come after recent information indicating widespread wage increases, including a survey from Wednesday that revealed a consistent growth in base pay for December. They also emphasize how the BOJ is gradually distancing itself from the extreme stimulus measures implemented by former Governor Haruhiko Kuroda, which aimed at reviving sluggish growth. In a December review analyzing the advantages and disadvantages of previous monetary easing measures, the BOJ stated that its earlier extensive stimulus positively influenced the overall economy. However, Tamura remarked that it was "a stretch" to claim the overall impact of the BOJ's extensive stimulus was beneficial. He similarly urged examining whether these policies might lead to future side effects, like significant declines in the yen.