A prominent Bank of Japan official has called for a faster pace of monetary tightening, aiming to guide interest rates toward a neutral level of 2%.
Bank of Japan board member Naoki Tamura stated on Thursday that the central bank should raise interest rates every few months, gradually moving the policy rate toward his estimated neutral rate of 2%. Concurrently, Deputy Governor Ryozo Himino noted that the global AI boom is significantly boosting Japanese export prices, which is counteracting the economic drag from rising oil prices and has substantially reduced downside economic risks.
Last week, the Bank of Japan raised its policy rate to 1%, the highest level since 1995. A Bloomberg survey indicates that approximately 90% of economists anticipate another rate hike within the year, with over half expecting it in December and 36% forecasting October.
Naoki Tamura's Hawkish Stance: Regular Hikes and a Readiness to Accelerate
Naoki Tamura outlined his envisioned policy path during a speech in Hyogo Prefecture on Thursday.
"My baseline scenario is to gradually approach a neutral interest rate of around 2% by raising rates by 25 basis points every few months," Tamura said.
He added that if inflationary upside risks intensify, the central bank must act more decisively: "If the likelihood of price upside risks materializing increases, I think it would be necessary to accelerate the pace, either by raising rates more frequently or in larger increments, without hesitation." He specifically cited factors like Middle East conflicts as potential drivers of higher inflation.
Tamura is widely recognized as a hawk within the central bank, having previously worked at Sumitomo Mitsui Financial Group and long advocating for a faster normalization of interest rates. At the April meeting, he, along with Hajime Takata and Junko Nakagawa, voted for a higher rate, adding a hawkish tone to the decision to hold steady. In last week's rate hike decision, he joined other board members in unanimously supporting the increase to 1%.
Notably, while Tamura's comments suggest a potential pace faster than current market consensus, they also imply he is unlikely to push for another immediate hike in July unless imminent inflationary pressures emerge.
AI Exports Drive "Volume and Price" Gains, Offsetting Oil Price Impact
Tamura's hawkish stance is supported by recent macroeconomic data.
Data cited by Bloomberg shows Japan's export price index rose 11.7% year-on-year in May, the largest increase since April 1979. Within this, export prices for electrical and electronic products surged 23.9%, marking the biggest jump since comparable records began in 1976.
The core driver behind this is the global AI boom. While Japan is not a primary producer of advanced AI chips, its companies play a crucial role in the global semiconductor supply chain, particularly in manufacturing equipment and materials.
Deputy Governor Ryozo Himino explained this shift in dynamics during a parliamentary speech on June 19th. He stated that at the April monetary policy meeting, the central bank was concerned about rising oil prices pushing up import costs, worsening trade terms, and creating downside economic pressure.
"But recently, the most notable development has been the sharp rise in export prices," Himino said. "Driven by the AI boom, exports of semiconductor manufacturing equipment and other AI-related products are increasing not only in volume but also significantly in price. In a sense, this appears to be offsetting the negative impact of rising oil prices."
Summary opinions from last week's policy meeting corroborate this view. One board member noted that "as overseas economies recover from a demand shock brought by the expansion of global AI-related demand, the deterioration in trade terms reflected in rising oil prices has eased, and concerns about an economic slowdown have also receded." Another member pointed out that "global AI-related demand is pushing economic activity and prices upward beyond expectations."
The Path Forward: Expectations for Another 2024 Hike Strengthen Amid Political Considerations
The improved macroeconomic fundamentals and hawkish voices within the central bank have strengthened market expectations for another rate hike this year.
The Bloomberg survey shows that following last week's hike, around 90% of economists expect another increase within 2024.
However, political resistance remains. Prime Minister Sanae Takaichi is seen as a supporter of accommodative monetary policy, and her government has repeatedly stated it wants the central bank to take government policy into account when making decisions.
Addressing this, Tamura stated clearly in his speech: "In my view, the mission of the central bank is to act as the 'guardian of price stability,' while maintaining sufficient communication with the government."
Bank of Japan Governor Kazuo Ueda also reiterated the central bank's stance on Wednesday, stating it will continue raising rates based on economic and price conditions but did not give a clear signal on the timing of the next move.
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