Japan's most hawkish policy board member, Hajime Takata, has once again called for an increase in the benchmark interest rate, describing the country's previously "frozen" inflation trend as now thoroughly heated at its core.
Speaking to local business leaders in Kyoto on Thursday, Takata stated that he believes the central bank should shift gears further and communicate based on the premise that the price stability target is nearly achieved.
Takata's remarks came just one day after Japanese Prime Minister Sanae Takaichi nominated two inflation-focused academics to join the Bank of Japan's policy board later this year, signaling her preference for maintaining loose monetary policy. His comments highlight the emerging divergence between more aggressive advocates for policy normalization on the board and the government's stimulus-supportive stance.
These statements were made ahead of the policy meeting scheduled for March 18-19, where the market widely expects the Bank of Japan to maintain its current policy settings.
At last month's policy meeting, Takata proposed consecutive interest rate hikes, a move that surprised observers of the central bank. This proposal indicated his concern that the bank might be falling behind the curve in responding to inflation and adjusting policy. He continued to elaborate on this theme in his Thursday speech.
"With years of patient, sustained monetary easing having laid the necessary groundwork, global inflationary pressures since 2020 may have 'heated the frozen food at its center'," Takata used a cooking analogy to describe Japan's inflation. "It is from this perspective that I now consider the Japanese economy to have nearly achieved the price stability target, and therefore anticipate a 'real dawn'."
In contrast, Takaichi implied on Wednesday that she desires continued monetary easing by selecting University of Tokyo Professor Toichiro Asada and Aoyama Gakuin University Professor Ayano Sato to replace Bank of Japan board members Asahi Noguchi and Junko Nakagawa. Noguchi's five-year term ends next month, while Nakagawa steps down in June.
Although Noguchi, known for his dovish stance, was widely expected to be replaced by a like-minded candidate, Takaichi's choice of two professors from the inflationist school still surprised some investors, leading to a weaker yen and higher long-term bond yields on Wednesday.
Despite Takaichi's clearer stance on monetary policy, yen weakness remains a key reason traders persist in forecasting rate hikes in the coming months. A weaker currency increases import costs, which in turn adds to inflationary pressures, negatively impacting household finances.
During European trading hours on Thursday, the yen traded near 156 against the US dollar, roughly at the level when Takata began his speech. Prior to the speech, the yen had strengthened following comments from Bank of Japan Governor Kazuo Ueda in an overnight interview with the Yomiuri Shimbun. In the interview, Ueda reiterated his view that the central bank would continue to raise interest rates if price and economic developments align with its projections.
Overnight index swaps indicated a 68% probability of a Bank of Japan rate hike in April, up from approximately 60% on Wednesday.
However, the pace of rate hikes envisioned by Ueda is almost certainly slower than what Takata advocates. At the January policy meeting, just one month after the Bank of Japan raised its benchmark rate to 0.75% - the highest level in three decades - Takata proposed a further increase to 1%.
Takata again emphasized the risks of moving too slowly to adjust policy when inflation overshoots. He stated, "One must keep in mind the risk that Japan could face price rises exceeding expectations if overseas factors that push up prices emerge."
While Takata articulated the hawkish position on the board, a speech by Bank of Japan Deputy Governor Ryozo Himino next Monday will offer observers a closer look at how the central bank's leadership views policy ahead of the March decision.
