The Bank of Japan (BOJ) is expected to implement further interest rate hikes, potentially tripling its policy rate to at least 1.5% within the next two years, according to former BOJ board member Makoto Sakurai. This projection is based on several key economic factors, including rising wages, sustained price increases, and robust economic growth. These positive indicators provide the central bank with the necessary leeway to continue its policy of steady interest rate adjustments.
Table Content:
Factors Driving the Projected Rate Hikes
Sakurai, who maintains close ties with current BOJ policymakers, highlighted several factors contributing to the anticipated rate increases. The recent decision to raise short-term interest rates from 0.25% to 0.5% demonstrates the BOJ’s commitment to addressing inflationary pressures. This move signals a decisive shift away from a decade of stimulus measures.
The BOJ’s proactive approach to rate adjustments is further evidenced by its decision to raise rates in January rather than waiting until March. This suggests a willingness to act swiftly and decisively in response to evolving economic conditions. Sakurai anticipates the next rate hike could occur as early as April, potentially influenced by the upcoming upper house election in July.
Timing and Political Considerations
While June or July are considered the most likely timeframe for the next rate hike to 0.75%, political factors could influence the precise timing. Prime Minister Shigeru Ishiba’s current political standing and low approval ratings introduce an element of uncertainty into the equation.
The BOJ’s upcoming policy meetings in March and April/May, where fresh growth and inflation forecasts will be issued, will be crucial in determining the future trajectory of interest rate policy. The April/May meeting will be particularly significant as it coincides with the release of updated economic projections.
Long-Term Policy Goals
The BOJ’s long-term objective appears to be raising short-term rates to at least 1.5% by the end of fiscal 2026. This strategy would provide the central bank with greater flexibility to lower borrowing costs in the event of a future economic downturn. A 1.5% rate would strike a balance between supporting the economy and maintaining some degree of monetary accommodation.
This target rate of 1.5% would represent a significant policy shift, bringing the BOJ’s policy target to levels not seen since 1995, when the official discount rate (ODR) served as the primary policy tool instead of the current overnight call rate.
Neutral Rate and Inflationary Pressures
Estimates of Japan’s nominal neutral rate, the rate at which monetary policy neither stimulates nor restricts the economy, range between 1% and 2.5%. While Governor Kazuo Ueda acknowledges the difficulty of pinpointing the neutral rate in real-time, many analysts place it around 1%. Sakurai suggests BOJ executives likely estimate it to be in the 1.5%-2.0% range.
Japan’s core consumer inflation reached 3.0% in December, the highest level in 16 months and well above the BOJ’s 2% target. This sustained inflationary pressure further strengthens the argument for continued interest rate increases. The central bank’s commitment to achieving price stability underscores the likelihood of further rate adjustments in the coming years. Sakurai anticipates approximately two rate hikes per year over the next two years, barring unforeseen economic disruptions.
