A former member of the Bank of Japan's policy board has indicated that the central bank could raise its benchmark interest rate as early as April, driven by increasing market concerns over Prime Minister Sanae Takaichi's "dangerous" fiscal policy direction, which is causing sustained yen weakness. Former BOJ policy board member Makoto Sakurai stated in an interview, "The Bank of Japan must raise interest rates at least once by June or July. However, this action could also be brought forward to April."
These remarks come as the yen fell further following local media reports that Takaichi plans to call a snap election next month. On Tuesday morning in Tokyo trading, the yen touched 158.50 against the U.S. dollar, reaching its lowest level in a year and approaching the levels that prompted the Ministry of Finance to intervene in the currency market in 2024. Sakurai's perspective suggests he believes the BOJ will not act to support the yen in its next two policy meetings, implying that the responsibility for propping up the currency during this period, should the yen continue to fall, would fall squarely on the Finance Ministry.
Sakurai pointed out that although the BOJ raised borrowing costs to 0.75% last month—the highest level in three decades—this only served as a "brake" to prevent further yen depreciation and did not boost the currency's value as a typical rate hike normally would. The recent yen depreciation appears to reflect market participants' view that a victory for Takaichi in a snap election would strengthen her confidence to pursue a more expansionary fiscal spending plan.
"After an unnecessarily large economic stimulus package and the budget plan for the next fiscal year, the market does not truly trust Sanae Takaichi," Sakurai said. "The question is simple: why expand fiscal spending on such a large scale when inflation has already stabilized?" The market widely expects the committee led by Governor Kazuo Ueda to hike rates at a pace of roughly once every six months. Therefore, a rate hike in April would be earlier than the market consensus. According to overnight swap trading data from Tuesday morning, traders priced the probability of an April rate hike at approximately 40%.
Sakurai indicated that underlying market concerns about Takaichi's fiscal stance will keep the yen weak or push it even weaker, which will influence the central bank's interest rate decisions because a weaker yen exacerbates inflationary pressures through higher import costs. Key inflation figures due next week are expected to show that price increases have averaged above the BOJ's 2% target for four consecutive calendar years through 2025, marking the longest such streak since 1992.
As the cost of living shows a prolonged rise, Ueda's committee has signaled it is closely monitoring the impact of the weak yen on prices. Currently, the yen continues to hover near levels that triggered four rounds of intervention by Japanese monetary authorities in 2024. As Takaichi supports government spending to stimulate growth and has previously criticized the BOJ's rate hikes, the yen resumed its downward trend in early October last year as her likelihood of becoming Japan's first female prime minister increased.
Since taking office last October, Takaichi has already unveiled the largest supplementary budget since the COVID-19 pandemic, as well as the largest initial annual budget for the next fiscal year on record. Prime Minister Takaichi has repeatedly stated that she intends to pursue an active but responsible fiscal policy. Takaichi's supporters point out that Japan's fiscal health has improved, as inflation has pushed tax revenues to record levels and expanded the nominal size of the economy, thereby reducing the nation's debt-to-GDP ratio.
"Inflation has indeed increased tax revenues, but Takaichi is deciding on spending without first identifying the funding sources," Sakurai commented. "This is a very loose and dangerous approach." Traders also appear unconvinced, as yields on ultra-long-term government bonds—the most sensitive to the government's long-term fiscal stance—have shown a rapid upward trend. The 30-year Japanese government bond yield hit 3.52% on Tuesday morning, a record high, compared to around 3% at the end of October.
"Sanae Takaichi's fiscal measures are leading to a weaker yen," Sakurai stated. "It will be very difficult to rebuild market trust."
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