MNI INTERVIEW: Ex-BOJ's Sakurai Sees Hike By As Early As April
MNI (TOKYO) - The Bank of Japan is likely to raise its policy interest rate to 0.75% from 0.50% by as early as April following spring wage negotiations and would be willing to hike the policy rate to 1% in fiscal 2025, a former BOJ board member said.
“A rate hike in April when the first survey results of shunto wage negotiations are available cannot be ruled out. If capital investment remains solid and private consumption does not weaken, the bank is likely to raise the rate in April,” Makoto Sakurai, who left the BOJ in 2021, told MNI.
The results of the first wages survey by Rengo, the Trade Union Confederation, compiled with data mainly from large firms, will show strong hikes in base pay above 3%, Sakurai said.
“Strictly speaking, increasing the rate in June would be the orthodox approach, if your approach is to tighten once every six months, as it takes half a year for the Bank to assess the impact of a rate hike,” Sakurai said. But, he added, the Bank’s executives are willing to raise the policy rate early if they see a chance, and if the economy and prices are on track, though they remain wary of risks associated with potential policy moves by U.S. President Donald Trump.
Minor delays to sustainably reaching the 2% inflation target should not be an obstacle to hiking to 1% later in fiscal 2025 as inflation expectations are reasonably anchored at around 2%. (See MNI POLICY: BOJ Fails To Reach Inflation, Wages Agreement)
“Governor (Kazuo) Ueda said that Japan is in inflation, not deflation. But the BOJ has been saying underlying inflation is still below 2%. The BOJ has been using underlying CPI according to its needs,” Sakurai noted, adding that consumers are more concerned by actual prices of daily necessities such as food than by underlying trends.
CAUTION AS OF 1%
The BOJ is likely to become more cautious once it has raised rates to 1%, given possible political and public reactions to tighter policy, but reaching this level in fiscal 2025 would allow it to hike to 1.25% or 1.50% in fiscal 2026, should this be compatible with output and prices data, the former official said.
“What the BOJ would really like to do would be to raise the policy rate to 1.5%, in order to make room to cope with any economic downturn or another shock,” he said.
Even if the policy rate is raised to 1.5%, real interest rates would still be -0.5% if the 2% inflation target is achieved, which would permit the Bank to say that it is maintaining financial conditions at accommodative levels, he added. (See MNI INTERVIEW: BOJ To Aim For 1.5% Policy Rate - Sakurai)
The BOJ, which in June is due to conduct an interim assessment of its plan for reducing the scale of its bond buying, is likely to keep to its pace of lowering JGB purchases by JPY400 billion per quarter after April 2026, Sakurai said.
The BOJ is steadily reducing its balance sheet, which is scheduled to fall by 15% from its peak, a reduction similar in scale to the Fed’s balance sheet shrinkage of about 20%, he noted.
The Bank announcement of an end to the Fund-Provisioning Measure to stimulate bank lending as of June 30 means that the BOJ’s balance sheet is set to fall by JPY77 trillion by March 2028, according to Sakurai.