Former Bank of Japan Board Member: Kazuo Ueda may raise interest rates three more times during his term, raising the rate to 1.5%.

Former Bank of Japan policy board member Makoto Sakurai said on Monday that the Bank of Japan may raise interest rates three more times within Governor Haruhiko Kuroda's remaining term until early 2028, bringing the rate to 1.5%. Sakurai said that depending on the strength of the US economy and the development of domestic wages and prices, the first rate hike to 1.0% could occur around June or July next year. He mentioned in an interview that as interest rates rise to bring borrowing costs closer to what is considered a neutral level for the economy, criticism from dovish Prime Minister Sanae Takaichi's inflationist advisers could make further hikes more challenging. Staying in close communication with current policymakers, Sakurai suggested that the Bank of Japan may view 1.75% as the estimated neutral rate level. Raising rates to 1.5% would comfortably remain below that level and still allow the Bank of Japan enough room to cut rates when needed. He pointed out that if the US supports the Japanese economy with strong growth and domestic inflation remains above the central bank's 2% target, the Bank of Japan may raise rates twice in the next fiscal year starting in April 2026. Sakurai stated that if the uncertain outlook for the US economy increases and domestic inflation slows significantly, the Bank of Japan may choose to hike rates only once in the 2026 fiscal year and postpone further hikes until 2027. "The Bank of Japan may want to gradually resume rate hikes at a pace of about every six months. But it seems a bit concerned about the risks of facing resistance from the government," he said. "This may be the reason behind Kuroda's vague communication in the past." Last Friday, the Bank of Japan raised rates from 0.5% to 0.75%, bringing borrowing costs to a level not seen in 30 years, marking another milestone towards ending decades of massive monetary support. Raising rates to 0.75% brought the Bank of Japan's policy rate closer to its estimated Japanese neutral rate range of 1.0% to 2.5%. While Kuroda indicated that there is still some distance to go before reaching the lower end of the estimated range, he did not specify how many more rate hikes would be needed to bring rates to a neutral level. Government spending plans may backfire As markets believe that the Bank of Japan is not eager to further raise rates, the yen has been sold off, prompting concerns that the weak currency could trigger inflation and warnings from the government against yen-buying interventions. Sakurai said that the Bank of Japan may have already obtained approval from Prime Minister Takaichi and Finance Minister Katsuki Koyuki for normalization of policy, including last Friday's rate hike to 0.75%. "As long as the Prime Minister and Finance Minister express their agreement, there should be no problem with the Bank of Japan raising rates," he said. "But as rates inch closer to neutral levels, the situation may become more complex." With businesses passing on rising raw material costs and continually raising wages to address labor shortages, Japan's inflation rate has exceeded the Bank of Japan's 2% target for nearly four years. Sakurai pointed out that the Bank of Japan's Tankan survey indicates that businesses expect inflation rates of 2.4% one year, three years, and five years from now indicating entrenched inflation in the Japanese economy. He suggested that Takaichi's large spending plans aimed at easing the impact of rising living costs on households could backfire due to accelerating inflation. The current government's expansionary fiscal policy also poses risks of eroding market confidence in Japan's finances, leading to soaring bond yields and undesirable yen depreciation. "Even after the Bank of Japan's rate hike in December, the yen continued to weaken, indicating that currency weakness is more driven by market concerns about Japan's fiscal policy," Sakurai said. Under Kuroda's leadership, based on progress in Japan's sustained achievement of the 2% inflation target, the Bank of Japan exited a decade-long massive stimulus policy last year and conducted three rate hikes (including last week's hike to 0.75%). His five-year term will end in April 2028.