Key Takeaways
- The Bank of Japan (BOJ) is expected to raise interest rates roughly once every three months.
- Inflation is expected to exceed 3% by year-end, prompting BOJ to step up rate hikes.
- The BOJ is likely to raise rates to 2% by June next year, with terminal rates potentially higher if inflation remains elevated.
The Bank of Japan (BOJ) is expected to raise interest rates roughly once every three months, with the central bank aiming to push rates up to 2% by June next year, according to former bank board member Makoto Sakurai.
In September, the BOJ raised interest rates to a 31-year high of 1.25%, shifting its policy approach to address broadening price pressures from surging fuel costs and a weak yen, Sakurai said.
Government data shows that Japan has seen the cost of importing crude oil spike by around 70%-to-80% in recent months, driven by the US attack against Iran in February, which will boost consumer inflation ahead, Sakurai added.
A weak yen and robust AI-related demand are also boosting manufacturers’ profits, underpinning the economy and fuelling demand-driven price pressures, Sakurai said.
The BOJ is well aware of such price pressures, which led to a sea change in the way it approaches inflation, Sakurai noted in an interview with Reuters.
Consumer inflation may exceed 3% by year-end through early next year, forcing the BOJ to step up hikes to keep underlying inflation from overshooting its 2% target, Sakurai said.
The BOJ will probably revise up its inflation forecasts at its quarterly outlook report due in October and raise interest rates again most likely in December, Sakurai added.
If the upward revision to its price forecasts is very large, there’s a chance the BOJ could opt to hike in October instead of waiting until December, Sakurai said.
After the rate hike to 1.5% expected by year-end, the BOJ will likely raise rates to 1.75% in the first quarter of 2027 and to 2% by June next year, Sakurai said.
While the BOJ’s terminal rate is seen around 2%, the level could be higher if inflation remains elevated around 3%, Sakurai added.
The BOJ’s governor has signalled the central bank has entered a new phase focused on preventing inflation from overshooting its target, opening the door to further rate hikes, Sakurai said.
However, the yen fell as investors saw the BOJ’s message as not hawkish enough and instead focused on two dovish dissenters as a sign the central bank won’t tighten policy quickly enough to narrow the wide Japan-US interest rate gap, Sakurai said.
The BOJ is well aware of such price pressures, which led to a sea change in the way it approaches inflation.
Makoto Sakurai, Former bank board member
Consumer inflation may exceed 3% by year-end through early next year, forcing the BOJ to step up hikes to keep underlying inflation from overshooting its 2% target.
Makoto Sakurai, Former bank board member
