OKAYAMA, Japan, Sept 12 (Askume) – Hawkish policymaker Naoki Tamura said on Thursday the Bank of Japan should raise interest rates by at least 1% in the second half of the next fiscal year to reinforce the central bank’s determination to ease monetary policy and continue to tighten easing.
This is the first time that Bank of Japan policymakers have publicly stated the central bank’s ultimate target level for raising short-term borrowing costs.
Tamura said the likelihood of the Japanese economy sustainably reaching the Bank of Japan’s 2% inflation level is increasing, indicating conditions are building up for further interest rate hikes.
He also said Japan’s neutral interest rate, which is a level that neither cools nor stimulates the economy, is expected to be at least around 1%.
“Therefore, it is necessary to raise the short-term policy rate by at least 1% to sustainably achieve the BOJ’s price target,” Tamura said in a speech to business leaders in Okayama, western Japan.
The Bank of Japan’s current three-year growth and inflation forecast horizon has been extended from fiscal 2024 to fiscal 2026, effectively ending in March 2027.
Tamura said the central bank should accelerate the pace of interest rate hikes so that short-term borrowing costs rise to about 1% in the second half of the three-year period. This suggests interest rates will reach 1% around October 2025.
“I have no preconceived ideas about the path and speed of adjusting the amount of monetary support,” Tamura said at a news conference after meeting with business leaders.
“We will gradually raise interest rates in several stages while studying how each step affects economic activity,” Tamura said. He declined to comment on whether the BOJ might raise rates again later this year.
Tamura’s comments came after BOJ board members called on the BOJ to continue raising borrowing costs amid recent financial market volatility.
The Bank of Japan is expected to keep interest rates unchanged at its next meeting on Sept. 20, but more than half of economists polled by Askume last month predicted further rate tightening by the end of the year.
Risk of inflation
As the economy made progress toward its 2% inflation target, the Bank of Japan scrapped negative interest rates in March and raised short-term interest rates to 0.25% in July, a historic move.
Governor Kazuo Ueda said the central bank is ready to raise interest rates if inflation stays around 2% over the next few years and wages rise steadily as currently forecast.
In his speech, Tamura said he is “concerned that inflation risks are rising” as growing labor shortages are forcing companies to raise wages and pass on rising costs through price increases.
“We have to raise rates at the right time and in multiple stages,” said the former commercial banker, who is considered by the market as the most hawkish of the nine BOJ board members.
Core consumer inflation reached 2.7% in July, remaining at or above the 2% target for 28 consecutive months.
The neutral rate is important because central banks use it to set monetary policy. It cannot be observed directly, so policymakers must use economic models to estimate it.
