Former Bank of Japan (BOJ) Policy Board member Makoto Sakurai stated on Monday that the central bank may raise interest rates three more times during Governor Kazuo Ueda's remaining term until early 2028, potentially pushing rates to 1.5%. He also warned that the government's aggressive fiscal spending plans could backfire by fueling inflation.
Sakurai projected the next rate hike could occur in June or July next year, lifting the benchmark rate to 1.0%. The exact timing would depend on the strength of the U.S. economy and domestic wage-price developments in Japan.
He noted that while the BOJ hasn't publicly stated it, internal estimates likely place the neutral interest rate around 1.75%. Raising rates to 1.5% would keep policy below this level while preserving room for future cuts. However, as borrowing costs approach this neutral level—neither stimulating nor restraining the economy—further hikes would become more challenging.
Addressing market volatility, Sakurai cautioned that the government's massive spending program aimed at easing cost-of-living pressures might prove counterproductive. He argued the recent yen sell-off reflects concerns over Japan's fiscal credibility erosion from expansionary policies, not just rate expectations, potentially triggering bond yield spikes and further currency depreciation.
Path to 1.5% Rates Sakurai's analysis suggests the terminal rate under Governor Ueda's five-year tenure ending April 2028 would be 1.5%. If U.S. growth remains robust, supporting Japan's economy while domestic inflation stays above the BOJ's 2% target, two hikes could occur in FY2026 starting April 2026.
However, should U.S. economic uncertainty rise and Japan's inflation slow markedly, the BOJ might opt for just one 2026 hike and delay further moves to 2027. Sakurai observed that while the central bank may prefer returning to roughly semiannual hikes, it appears concerned about political resistance from the administration—possibly explaining Ueda's recent ambiguous communication.
Last Friday, the BOJ raised rates from 0.5% to 0.75%, marking a historic step in ending decades of ultra-loose policy. Though Ueda noted rates remain below the estimated neutral range (1.0%-2.5%), he didn't specify how many hikes would be needed to reach neutrality.
Political Hurdles and Tightening Pace As rates near neutral levels, policy normalization could grow more complex. Sakurai revealed the BOJ likely secured approval from senior officials including Economy Minister Sanae Takaichi and Finance Minister Satsuki Katayama for Friday's hike.
"As long as the prime minister and finance minister consent, BOJ rate hikes shouldn't face issues," Sakurai said in an interview. "But as rates approach neutral territory, the situation may become complicated."
Further hikes risk criticism from Takaichi's reflationist advisers, potentially intensifying political tensions around subsequent adjustments.
Fiscal Stimulus Inflation Risks With Japan's inflation exceeding the 2% target for nearly four years—as firms pass rising costs to consumers and hike wages amid labor shortages—Sakurai highlighted the BOJ's Tankan survey showing businesses expect 2.4% inflation over one, three, and five years, suggesting entrenched price pressures.
Against this backdrop, Takaichi's large-scale spending programs, while designed to cushion households, risk accelerating inflation. Sakurai warned expansionary fiscal policies could undermine market confidence in Japan's fiscal health.
He noted the yen's continued weakness post-December hike indicates currency pressures stem more from fiscal policy concerns than monetary expectations. Such worries over fiscal discipline might trigger sharp bond yield rises and undesirable yen depreciation, counteracting monetary efforts to stabilize prices.
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