A former Bank of Japan policy board member, Makoto Sakurai, stated on Monday that Japan is on the brink of repeating a policy mistake that led to decades of economic stagnation. He warned that inflation risks stemming from the conflict in Iran, if not addressed promptly, could compel the central bank to implement sharp interest rate hikes.
The energy shock triggered by this conflict has led policymakers, including BOJ Governor Kazuo Ueda, to look for solutions by referencing historical precedents. Governor Ueda specifically cited the oil crises of 1973 and 1979-1980 as reference cases.
What Governor Ueda did not mention was Japan's asset bubble, which was partly fueled by the BOJ's massive money-printing in 1986 to counter yen appreciation. The central bank maintained an easy policy even as asset prices soared, only changing course in 1989. The subsequent series of aggressive rate hikes burst the bubble and is widely considered a primary cause of the three-decade-long economic stagnation.
Makoto Sakurai, who maintains close contact with current policymakers, said that if the BOJ keeps interest rates low for too long, it risks repeating this error. This could force it into a position of having to raise rates sharply later if inflation accelerates.
"Given the broadening inflationary pressure from the Iran war, stagflation is inevitable," Sakurai stated on Monday.
"There is a significant risk that the BOJ will fall seriously behind the inflation curve. Not raising rates in June is unthinkable," he said.
The Bank of Japan ended a decade-long massive stimulus program in 2024 and has raised rates multiple times, including in December last year. However, its short-term policy rate remains at a low 0.75%, even though inflation has exceeded the 2% target for four consecutive years.
Following a series of hawkish signals from the BOJ, markets are pricing in an approximately 80% probability of a rate hike to 1% in June.
The Iran conflict complicates the BOJ's decisions on the timing and pace of rate hikes, as rising energy costs both push up inflation and squeeze Japan's economy, which is highly dependent on oil imports.
Sakurai noted that while subsidy measures have kept core inflation below the BOJ's 2% target in recent months, the rate is likely to accelerate to around 3.5% starting in the autumn as businesses pass on the war-induced cost increases to consumers.
"If the BOJ is hesitant to raise rates now, it will be forced to hike at a faster pace in the future, damaging the economy," Sakurai said. "We are just one step away from repeating the mistake that led to Japan's 'lost decade.'"
Comments