Hawkish BOJ Policymaker Advocates for Raising Rates to At Least 1% – Reuters

By Leika Kihara

Okayama, Japan – On Thursday, Naoki Tamura, a policymaker with a hawkish stance at the Bank of Japan (BOJ), stated that the central bank should aim to raise interest rates to at least 1% by the second half of the upcoming fiscal year. This assertion strengthens the BOJ’s commitment to gradual monetary tightening.

In an unprecedented move, this is the first time a BOJ official has publicly indicated a specific target level for increasing short-term borrowing costs. Tamura highlighted that the chances of Japan’s economy achieving the BOJ’s inflation goal of 2% are improving, implying that the conditions necessary for additional rate hikes are aligning.

He also mentioned that Japan’s neutral interest rate—the level that neither stifles nor fuels economic activity—is estimated to be around 1%. Tamura emphasized that achieving the BOJ’s inflation target sustainably requires an increase in the short-term policy rate to about 1%.

The BOJ’s current projections for growth and inflation cover the fiscal years from 2024 to 2026, concluding in March 2027. He suggested that the BOJ should carefully time its rate hikes, aiming for the benchmark to reach approximately 1% during the latter half of this three-year period, potentially by October 2025 at the earliest.

Tamura clarified that he does not have a predetermined approach for adjusting monetary support and indicated that any rate increases would likely occur gradually, with close attention to their impact on economic activity. He did not comment on the possibility of another rate hike before the end of the year.

His comments align with recent statements from other BOJ board members, who are advocating for continued increases in borrowing costs, notwithstanding recent fluctuations in financial markets. The BOJ is expected to maintain current rates at its next meeting on September 20, though many economists anticipate further tightening before the year concludes.

In a significant policy shift earlier this year, the BOJ abandoned negative interest rates in March and raised short-term rates to 0.25% in July, citing progress toward a sustainable 2% inflation rate. Governor Kazuo Ueda has indicated the central bank’s willingness to raise rates further if inflation remains around 2% over the coming years along with consistent wage growth.

During his speech, Tamura expressed concern about rising inflation risks, attributing it to labor shortages that are prompting companies to increase wages and subsequently raise prices. He reiterated the need for a methodical approach to interest rate hikes.

Core consumer inflation reached 2.7% in July and has exceeded the 2% target for 28 consecutive months. The neutral interest rate plays a crucial role in guiding central banks’ monetary policy, although it cannot be directly observed and must be estimated through economic analysis.