A former member of the Bank of Japan's policy board has indicated the central bank may implement two interest rate increases before the end of the current fiscal year, following a pivotal shift in its policy focus towards growing inflation risks.
Sakurai Makoto, a former BoJ policy board member, stated on Friday that the central bank's decision this week to raise its short-term policy rate to 1%—a 31-year high—was justified by the need to guard against core inflation exceeding its 2% target. This rationale marks a significant departure from previous hikes, which were based on confidence in sustainably achieving the inflation goal.
In an interview, Sakurai described this as a major turning point in monetary policy, signaling the BoJ's clear pivot towards inflation containment. He noted the move reflects intensifying concerns over inflation risks and will substantially influence the future path of rate hikes. Sakurai maintains close communication with current central bank officials.
He pointed to recent sharp increases in wholesale prices, which are expected to pass through to consumer prices in the coming months. The extent of inflation acceleration for households in the July-September quarter will be a key determinant for the timing of the next rate increase.
Sakurai stated that another hike before year-end is virtually certain, with the BoJ likely to act in either October or December while closely monitoring subsequent inflation data. He added that if inflation rises in line with market expectations, the central bank might adopt a cautious wait-and-see approach, potentially delaying the hike until December to avoid pricking asset price bubbles.
However, should inflation accelerate rapidly beyond warning levels, the BoJ could raise rates in October and implement a second hike within the fiscal year ending next March.
"With corporate profits improving and a tight labor market, the risks of inflation overshooting outweigh those of an economic downturn. In this environment, the central bank will continue to prioritize fighting inflation as its core policy objective," Sakurai said.
He projected that by the end of Governor Ueda Kazuo's five-year term in early 2028, the policy rate could reach around 2%.
Geopolitical tensions in the Middle East complicate the timing and pace of hikes, as rising energy prices both fuel inflation and dampen the oil-import-dependent Japanese economy. The persistently weak yen also raises import costs, further spreading inflationary pressures.
Sakurai believes that neither rate hikes nor currency market intervention can reverse the yen's depreciation trend, which he attributes primarily to market concerns over expansionary fiscal policies under Prime Minister Takaichi Sanae's government. Takaichi has consistently supported loose fiscal and monetary conditions, implementing large-scale spending plans and subsidies to reduce public fuel costs. The current administration has already introduced a supplementary budget of 3 trillion yen (approximately $186 billion), funded by new bond issuance.
Sakurai warned that if the Takaichi government introduces a second supplementary budget this year, markets may grow increasingly worried about Japan's deteriorating fiscal health, potentially triggering a sovereign credit rating downgrade and further yen weakness.
"Japan's core contradiction lies in the central bank tightening monetary policy to curb inflation while expansionary fiscal policy is simultaneously stoking it—their policy directions are in conflict. Without resolving this contradiction, the predicament of a weak yen cannot be overcome," Sakurai concluded.
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