A former Bank of Japan executive board member has indicated that the central bank may raise interest rates sooner than most anticipate to normalize the current financial environment, which he deems excessively accommodative.
Kenzo Yamamoto, a former BOJ board member, stated in an interview on Monday that the central bank's current situation necessitates prompt action. When questioned on whether the BOJ would hike rates in December as predicted by most economists, Yamamoto suggested the next increase could arrive earlier, given the prevailing degree of monetary easing.
Earlier this month, the Bank of Japan raised its benchmark policy rate to 1%, marking its highest level since 1995. Yamamoto, who left the central bank in 2012, noted that over the past four years, a core inflation measure—which excludes fresh food and special factors like government subsidies—has averaged around 3%, significantly above the bank's 2% target.
However, Japan's key inflation gauge, the core consumer price index excluding fresh food, held steady at 1.4% in May, aided by cost-of-living control measures implemented by the government. The BOJ has recently stated that the underlying price trend remains slightly below 2%.
Yamamoto expressed concern, stating that if the BOJ claims its inflation metrics do not accurately reflect price trends, it would be worrisome. He emphasized that the central bank needs to shift its focus towards inflation control.
While market institutions differ on the exact timing of the BOJ's subsequent rate hikes, the direction is largely aligned. Goldman Sachs anticipates the BOJ will maintain a pace of roughly one rate hike every six months. Mitsubishi UFJ Financial Group expects one more hike later this year. Barclays offers a more aggressive forecast, suggesting the current tightening cycle is far from over, with 25-basis-point hikes expected in October this year and April 2027, ultimately pushing the policy rate to 1.5%.
As of early June, market pricing implied roughly a 50% probability of another rate hike at the October meeting. Minutes from the June policy meeting revealed that most board members were attentive to upside inflation risks from supply shocks, such as oil prices, and favored continuing gradual rate increases. One member even argued that the BOJ must hike rates every few months to raise the policy rate closer to a neutral level sooner, thereby avoiding the need for large, abrupt hikes in the future.
Adding to the hawkish sentiment, BOJ board member Naoki Tamura stated on June 25th that the baseline path involves raising rates by 25 basis points every few months, aiming directly for a neutral rate of 2%. He noted that the frequency or magnitude of hikes could be increased if inflation risks intensify.
Yamamoto, formerly head of the BOJ's Financial System and Bank Examination Department, expressed confusion over the bond purchase plan announced at the June policy meeting. The BOJ decided to halt the reduction in its monthly bond purchases from fiscal 2027 onward, maintaining purchases of around ¥2 trillion per month.
Yamamoto remarked that while the appropriate size of the BOJ's bond holdings is unclear, it is evident the bank is still far from that level. He saw no need to cease the reduction in bond purchases so early, warning that the plan would keep financial market liquidity abundant.
He further cautioned that, given the government's consistent support for easy policy, the BOJ could face political pressure to increase bond purchases again without a clear roadmap for normalizing its balance sheet. Another risk he highlighted is that the BOJ might be forced to raise rates higher than necessary due to persistently overly loose financial conditions.
At a post-meeting press conference on June 16th, Deputy Governor Shinichi Uchida stated it was premature to discuss the appropriate size of the balance sheet. The BOJ projects that by early 2030, its government bond holdings will have fallen by about 37% from the level two years prior, before it began reducing purchases.
According to Yamamoto's calculations, holdings would still reach around ¥200 trillion by 2035—approximately double the level when the BOJ launched its massive monetary easing program in April 2013. During the stimulus period lasting into early 2024, the BOJ's balance sheet swelled to exceed the size of Japan's economy, far surpassing those of the Federal Reserve and the European Central Bank, primarily due to aggressive government bond purchases, including under its yield curve control program.
Yamamoto concluded that the BOJ's bond plan essentially declares that its balance sheet will never return to pre-easing levels, an undesirable consequence of implementing ultra-loose monetary policy.
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