Former Bank of Japan Governor Haruhiko Kuroda stated that, given Japan's economy is now in a "very healthy state," the country must continue with interest rate hikes and tighten fiscal policy. He also warned that the large-scale spending plan proposed by Prime Minister Sanae Takaichi could accelerate inflation. Kuroda provided specific predictions for Japan's future rate hike path, suggesting that with the economy maintaining steady growth and wages continuing to rise, the Bank of Japan should maintain a pace of about two rate hikes per year during 2026 and 2027. He emphasized that this measure aims to gradually raise the benchmark interest rate to a "neutral level" that neither stimulates nor restrains the economy. Kuroda believes Japan has now escaped the shadow of decades-long deflation, and the normalization of monetary policy has become a necessary choice to support the yen's exchange rate and prevent economic overheating.
In an interview on Tuesday, Kuroda said: "When Abenomics was implemented, Japan was suffering from deflation and a strong yen. Now, Japan faces inflation and a weak yen. Japan needs to shift towards tighter fiscal and monetary policies." He added, "The Bank of Japan must gradually raise interest rates to a level neutral for the economy. Fiscal policy must also be tightened. I have doubts about the appropriateness of increasing spending and cutting taxes." These remarks highlight a significant policy divergence between Kuroda, a key architect of Abenomics, and its current proponent, Prime Minister Sanae Takaichi, as Japan's economic landscape evolves.
Kuroda is known for launching an aggressive monetary stimulus program in 2013, which was part of former Prime Minister Shinzo Abe's "Abenomics" reflationary policies. The former central bank governor's term ended in 2023, after a decade of using unconventional policy tools to drive economic growth and inflation. In recent years, with inflation consistently above the 2% target and a tight labor market pushing wages higher, the Bank of Japan halted the Kuroda-era stimulus in 2024 and has raised interest rates multiple times, including a hike in December last year.
In contrast, fiscal policy may continue on an expansionary path. As a supporter of Abenomics, Takaichi has increased spending and pledged to suspend the 8% consumption tax on food for two years to alleviate the impact of rising living costs on households. Kuroda, now a senior fellow at the National Graduate Institute for Policy Studies (GRIPS), warned that such expansionary fiscal policy could be counterproductive, exacerbating inflationary pressures and pushing up bond yields. "It is reasonable for the government to support innovation to promote long-term potential growth. But spending to cushion the impact of rising living costs is counterproductive because it fuels inflation," he stated.
Regarding the yen, Kuroda noted that, based on Japan's recent economic growth, price trends, and the equilibrium exchange rate determined by economic competitiveness, the recent performance of the yen might be "somewhat too weak." He mentioned that while currency intervention can influence the yen's movement in the short term, it cannot ensure a sustained impact. Notably, Kuroda served as Japan's top currency diplomat from 1999 to 2003, responsible for formulating and executing exchange rate policy.
Kuroda also suggested that if the Japanese economy maintains its current growth momentum, the Bank of Japan might raise the key policy rate, currently at 0.5%, to around 1.5% - 1.75% in the coming years. Although the inflation target was not achieved during his tenure, his decade-long massive stimulus successfully reversed the trend of a persistently strengthening yen, which had been damaging Japanese exporters' profits. A hallmark of Kuroda's monetary experiment was its simple, bold communication style, aimed at convincing the public that prices would finally rise after decades of deflation. However, he stated that such shock-therapy communication is no longer suitable as the Bank of Japan seeks a smooth exit from stimulus and policy normalization. "When the central bank is gradually raising rates towards a neutral level, there is no need to say much. Keeping a low profile is wiser. Governor Ueda's approach to communication is appropriate," he said.
On Wednesday, the yen traded at 155.80 against the dollar. Although verbal intervention by Japanese authorities has prevented the yen from breaking through the key psychological level of 160, it has been unable to reverse the persistent trend of yen weakness and depreciation. This decline continues to push up import costs, thereby increasing overall inflationary pressure. Following Takaichi's significant election victory on February 8th, market attention has focused on whether she will more strongly advocate for loose fiscal and monetary policies. Late last year, she had to moderate her related policy stance after concerns about Japan's deteriorating fiscal conditions triggered large-scale selling of the yen and government bonds. Reports on Tuesday indicated that Takaichi expressed reservations to Bank of Japan Governor Kazuo Ueda about further interest rate hikes, signaling potential friction in monetary policy and potentially complicating the central bank's rate hike plans.
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