Eiji Maeda, a former BOJ executive director who once oversaw monetary policy affairs, indicated that the Bank of Japan may continue raising interest rates once every three months to prevent inflation from deviating from its price stability target.
He stated, "I expect the BOJ's next rate hike will come in December, followed by another possible increase in March or April next year." He added, "The pace of rate hikes has already accelerated to roughly once every three months, and I believe this pace is appropriate."
Maeda's forecast broadly aligns with market pricing. Overnight index swap markets show that investors assign about an 80% probability to a BOJ rate hike before December. The market widely expects the BOJ to keep rates unchanged at its next policy meeting on October 30.
Meanwhile, a recent survey shows that most economists expect the BOJ to raise its benchmark rate to 1.50% in December, following hikes in June and September, extending the relatively rapid quarterly pace of tightening in this cycle — a cycle that began with the BOJ raising rates only once a year.
The BOJ's rate increases in June and September were the fastest pace of hikes since 1990. This policy shift occurred against the backdrop of accelerating consumer price increases in Japan and a weakening yen. The yen's weakness had prompted joint intervention in the foreign exchange market by Tokyo and Washington, with the U.S. also applying pressure on Japan to tighten monetary policy.
Maeda, who led the BOJ's initial response to the COVID-19 pandemic, did not entirely rule out the possibility of the BOJ raising rates at consecutive meetings in the future under specific circumstances, such as a sharp depreciation of the yen. However, he said such a scenario currently seems unlikely.
He explained, "If the BOJ raises rates at consecutive meetings, the market may increasingly expect another hike at the following meeting, and that carries considerable risk. This is also a reason for the BOJ to avoid back-to-back rate increases."
A major focus of the BOJ's October policy meeting is whether the policy committee led by Governor Kazuo Ueda will judge that underlying inflation has reached the 2% target for the first time since the target was set in 2013. On this point, Maeda said, "I don't expect the BOJ to explicitly declare that the 2% price stability target has been achieved. But it would not be surprising if the BOJ modestly brings forward that judgment."
Data due Friday is expected to show Japan's headline inflation rate rose to 2.1% in September, while core inflation, which excludes fresh food and energy, accelerated to 2.3%. Ueda said last week that because underlying inflation is already very close to the target, the BOJ can no longer tolerate further rises in underlying inflation, signaling his support for additional rate hikes.
Japan is gradually emerging from long-term deflationary pressure. People familiar with the matter said that although it can finally be judged that the underlying inflation rate is around 2%, the BOJ's mission is not yet complete because its goal is to keep inflation stably near that level.
However, Maeda said that if the BOJ determines next week that price trends are already close to the target while financial conditions remain accommodative, that would send a signal to the market of a December rate hike.
After the September hike, the BOJ's policy rate rose to 1.25%, entering for the first time its estimated neutral rate range of 1.1% to 2.5% — the neutral rate being the level that neither stimulates nor restrains the economy.
Maeda said the BOJ may ultimately be forced to raise its benchmark rate to 2.25%, which essentially means four more rate hikes are needed. He stated, "If the midpoint of about 1.75% is used as a reference, the policy rate will reach neutral levels around next spring. From that period onward, policy decisions and the explanations for those decisions may become more difficult."
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