Former member of the Bank of Japan sends a signal: high probability of interest rate hike in April, steadily advancing towards the normalization starting point of 1.25%

According to a former member of the Bank of Japan Policy Board, the Bank of Japan is highly likely to decide to raise interest rates at its meeting in April this year. Seiji Adachi pointed out that compared to March, when data is still insufficient, April will bring together several key indicators such as the final results of the "Shunto" wage negotiations, business sentiment surveys, and the latest quarterly inflation prospects. These key data will provide policymakers with solid evidence to confirm that the target of a "positive cycle of wages and prices" has been achieved, thereby providing strong empirical support for further tightening of monetary policy. In Adachi's policy roadmap, he predicts that Japanese interest rates are expected to gradually increase to around 1.25%. He emphasized that 1.25% is not only an important milestone in the current rate hike cycle, but also symbolizes the formal return of Japanese monetary policy to a "normalized" starting point - at which point Japan will completely bid farewell to the special policy environment that has lasted for decades to combat deflation. Adachi's views align with the increasingly strong market expectations that under the leadership of Bank of Japan Governor Haruhiko Kuroda, monetary policy may see action in the spring, earlier than most economists predicted after the last rate hike in December of last year. In terms of the political and macroeconomic environment, although current Japanese Prime Minister Sanae Takaichi is seen as a supporter of expansionary monetary policy on traditional grounds, Adachi believes that the government's likelihood of intervening to block rate hikes is low. He stated that although some people think that after winning a landslide victory in last week's general election, Japanese Prime Minister Sanae Takaichi may disrupt the Bank of Japan's normalization process, she is unlikely to stop the rate hike as it may backfire. "Takaichi seems to be very sensitive to market dynamics," said Adachi. "If Takaichi tells the Bank of Japan not to raise rates, the potential market reaction could be a depreciation of the yen." During their first meeting after Monday's election, Japanese Prime Minister and Governor Kuroda discussed economic issues and exchanged overall views but did not make specific requests. At the time of Adachi's statement, current members of the Bank of Japan Policy Board have hinted that after raising policy rates to 0.75% in December - the highest level in thirty years, there may be further rate hikes in the future. One of the most hawkish members, Naoki Tamura, indicated in a speech last week that there may be rate adjustments in the spring. For the Bank of Japan, a key factor is the progress of the annual wage negotiations currently underway. As agreements with large companies are not expected to be reached until March 23, the committee may consider taking action at the next meeting ending on March 19 to be premature, according to Adachi. By the time the Policy Board members meet on April 27-28, they will have seen the results of the wage negotiations and the latest quarterly survey of business and household confidence released earlier in the month. Adachi stated that this meeting also coincides with the release of the updated economic outlook report by the Bank of Japan. Adachi served as a member of the Policy Board until March of last year. During his tenure, the Policy Board was busy weighing the risks of returning to deflation, and the idea of raising rates faced continuous internal opposition. He stated that since leaving, he has felt that the Bank of Japan's position on rate hikes has shifted. "The Bank of Japan seems to be slightly more positive about raising rates," Adachi said, noting that the emphasis on the lower end of the estimated neutral rate range of 1% to 2.5% has decreased. "Now it's not just focusing on the lower end of the range. This may be related to its desire to leave room to adjust rates in case of potential economic downturns in the future." Adachi cannot determine how much further the Bank of Japan may raise rates after raising them to 1.25% following two more rate hikes - this uncertainty stems from Japan's objective constraint of a potential growth rate of only about 0.5%. It is worth noting that his peak rate forecast (slightly below 1.5%) is significantly lower than the median level (1.5%) estimated by economists in last month's survey. On Monday, a government report showed that the Japanese economy grew by 0.2% annually in the last three months of last year, significantly lower than the market's widespread expectation of 1.6%. Adachi said that given Japan's growth potential, this is not surprising. "Once rates reach around 1.25%, the Bank of Japan will eventually return to the starting point of normal monetary policy - ending policies to combat deflation risks," Adachi said.