THE Bank of Japan (BOJ) is likely to keep raising its benchmark rate to a level exceeding the current market consensus, and there’s a chance two more moves could come this year on top of last month’s hike, according to a former executive director at the central bank.
“My base view is that there is a lot more coming,” Hideo Hayakawa, the former director, said on Tuesday (Feb 4). “There is little logical reason to believe that rate hikes will stop early.”
Based on his own assessment, Hayakawa said he sees the BOJ’s terminal rate in this cycle somewhere around 1.5 per cent. That’s higher than most analysts’ view, although it’s in line with a projection issued by the International Monetary Fund.
Hayakawa’s comments come as the market is focused on gauging the likely pace of policy normalisation after governor Kazuo Ueda’s board raised borrowing costs to 0.5 per cent, the highest level in 17 years, on Jan 24. Hayakawa foresees the next hike coming around July, with another move possible towards the end of the year, he said.
Among factors backing his views, Hayakawa cited the BOJ’s published estimate for the neutral rate that puts the level in a range somewhere between around 1 per cent and 2.5 per cent in nominal terms. The median estimate of private economists puts Japan’s terminal rate at 1 per cent, according to a Bloomberg survey last week.
“They will get to 1 per cent first,” Hayakawa said. “It’s wrong to view that the BOJ will stop at the low end of their estimate. It means that they will be carefully taking steps, a little by little, after getting the rate to 1 per cent.”
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At his post-decision press conference last month, Ueda said the BOJ’s benchmark rate is still far from neutral, the level considered neither stimulative nor restrictive for growth. The remarks suggested that the governor is not ruling out the possibility of taking the rate above 1 per cent, Hayakawa said.
The timing of the next hike could be brought forward depending on the level of the yen, Hayakawa said. While the Federal Reserve’s recent pause in its rate-cut cycle allows greater policy flexibility for the BOJ, the impacts of US President Donald Trump’s policies are hard to predict, he said.
Another source of concern is a recent rise in the cost of fresh foods. Inflation that hits daily household budgets risks exerting a drag on consumer spending, a development that would cast a shadow over the BOJ’s normalisation path, said Hayakawa, who was also a former BOJ chief economist.
“My concern is that, as it’s been the case, consumer spending will end up being weaker than anticipated, with real wages dragged down by rising costs for fresh foods,” he said.
Overall 12-month inflation quickened to 3.6 per cent in December, the fastest pace in almost two years, while gains in a gauge that excludes fresh food were relatively muted at 3 per cent. The cost of fresh foods alone rose by 17.3 per cent, the steepest pace in eight years.
The BOJ revised its quarterly inflation projections higher in the same meeting when it hiked rates last month. It now predicts key price measures to be at 2 per cent or higher for all three fiscal years in its outlook period to March 2027.
“There are upside inflation risks, and that’s a pain in the neck for the BOJ,” Hayakawa said. BLOOMBERG
