Where is the end point for the Bank of Japan's interest rate hike? Senior market insiders boldly predict that the benchmark interest rate may rise to a 30-year high.

One of the senior market executives of Japan's largest bank believes that if the current economic trends continue, the Bank of Japan may raise the benchmark interest rate to 2%, which would be the highest level in 30 years. Masamichi Koike, Head of Global Markets at Sumitomo Mitsui Financial Group, said that as long as the US economy does not enter a recession, the Bank of Japan could raise the benchmark interest rate from the current 0.5% to 1% this year. He added, "I don't know if it will be in 2026 or 2027, but if it is necessary to cool down the economy or inflation, then I think the benchmark interest rate will have to rise to 2%." As the Bank of Japan has begun raising interest rates and reducing government bond holdings, traders are closely watching whether Japanese financial institutions will resume buying Japanese government bonds. Masamichi Koike stated that the yield on the benchmark 10-year Japanese government bonds could continue to climb to over 2%. Therefore, Sumitomo Mitsui Financial Group has postponed adding a large amount of Japanese government bonds to its 4 trillion yen securities portfolio. He said, "Japan is in a tightening cycle. If we expand our portfolio now, we may face greater valuation risks in the future." Masamichi Koike has been prescient about the rise in Japan's benchmark interest rates in the past. In September 2023, he predicted that sticky inflation would drive short-term and long-term bond yields up from their lows. Six months later, the Bank of Japan exited its long-standing negative interest rate policy, with the 10-year Japanese government bond yield breaking 1.5% last week for the first time in 16 years. It is worth noting that Masamichi Koike's forecast of Japan's benchmark interest rate possibly rising to 2% is more hawkish than the market's general consensus. Economists expect the Bank of Japan to eventually raise the benchmark interest rate to 1.25%. Masamichi Koike believes that Japan's inflation rate will remain above 2% driven by rising import costs due to global trade turmoil. However, he expects that the Bank of Japan's rate hikes will not have a significant negative impact. He emphasized that the Governor of the Bank of Japan, Haruhiko Kuroda, and the Monetary Policy Committee will raise rates based on the health of the economy. He said, "The Bank of Japan will raise interest rates very cautiously to nurture nascent inflation." "As wages rise and inflation enters a virtuous cycle, the economic conditions are improving. But they are not robust and do not need to be cooled." In addition, Masamichi Koike is cautious about buying US Treasuries and other foreign bonds. He expects the Federal Reserve not to cut interest rates this year because the US economy will remain healthy. He added that Sumitomo Mitsui Financial Group is buying index funds for Japanese and overseas stocks, partly to hedge against inflation risks. He said the company is also allocating some funds to alternative funds. Masamichi Koike pointed out that the most important factor influencing the market this year is the economic and diplomatic actions of US President Trump. He also believes that Trump's actions are not as arbitrary as they seem, but well thought out to achieve the desired results. Multiple factors boost prospects for Bank of Japan rate hike Currently, under the joint influence of multiple factors, the market's expectations of a Bank of Japan rate hike have been boosted. The market generally expects the Bank of Japan to conduct the next rate hike this summer. Japan's Ministry of Health, Labour and Welfare announced on Monday that in January, basic wages rose by 3.1% year-on-year, the largest increase since October 1992. In addition, a more stable wage trend indicator showed that full-time workers' wages grew by 3%, exceeding this threshold for the first time since July last year. Overall, these data suggest that while workers' household budgets are affected by persistent inflation, the trend of basic wages remains strong. Therefore, these data may lead the Bank of Japan to continue gradually raising interest rates. At the same time as the release of this data, annual wage negotiations between Japanese labor unions and employers are expected to reach a climax later this week, producing preliminary results for this year's agreements. According to a survey released by the Japanese market research company Teikoku Databank in mid-February, out of the 11,000 Japanese companies surveyed, about 61.9% plan to raise employee wages in the new fiscal year as they strive to recruit and retain employees, the highest proportion ever recorded. In addition, about 56% of the surveyed companies said they plan to increase basic wages, the highest level since Teikoku Databank began tracking this issue in 2007. Although the survey did not specify the extent of the salary increases planned by Japanese companies, it indicates that the momentum of Japanese wage growth continues and will have a broader impact. For the Bank of Japan, this is undoubtedly a positive sign. In addition to wage growth, a series of economic data indicating rising inflation and the hawkish statements of Japanese policymakers are also important factors driving up expectations for a Bank of Japan rate hike. Bank of Japan Deputy Governor Shinichi Uchida reiterated last Wednesday the Bank of Japan's stance of continuing to raise policy rates, although he suggested that the Bank of Japan is unlikely to raise rates at two consecutive meetings, with little chance of a rate hike in March. Furthermore, some analysts believe that US President Trump's focus on addressing trade imbalances is favorable to a Bank of Japan rate hike, as this would weaken the Japanese government's traditional resistance to yen appreciation and rate hikes, prompting the Japanese government to take a more accommodative stance on the issue of yen appreciation.