World Stock Watch

Japan’s Economic Growth Sparks Rate Hike Speculation

Central Bank’s Next Move

The Bank of Japan is poised to raise interest rates again in the coming months, with a potential target of at least 1.5% in the next two years, according to former BOJ board member Makoto Sakurai. This move would mark a significant shift in the country’s monetary policy, driven by broadening wage hikes, sustained price rises, and solid economic growth.

Economic Indicators Point to Rate Hike

Sakurai, who maintains close ties with current policymakers, believes the BOJ will seize opportunities to raise interest rates without delay. The central bank’s recent decision to raise short-term interest rates to 0.5% from 0.25% despite uncertainty surrounding US President Donald Trump’s policies suggests a willingness to act swiftly.

Timing of Next Rate Hike Uncertain

While Sakurai predicts the BOJ will likely raise rates to 0.75% around June or July, domestic politics could influence the timing. With an upper house election expected in July, the BOJ may push forward the timing of its next rate hike to April to avoid political uncertainty.

BOJ’s Long-Term Goals

The central bank aims to raise short-term rates to at least 1.5% by the end of fiscal 2026, providing scope to reduce borrowing costs when the economy faces another downturn. This move would allow the BOJ to argue it is still supporting a fragile economy with some degree of accommodation.

Neutral Rate Estimates

BOJ staff estimates suggest Japan’s nominal neutral rate lies between 1% and 2.5%. While Governor Kazuo Ueda has stated that the neutral rate is difficult to pin down in real-time, many analysts believe it to be around 1%. Sakurai suggests BOJ executives see Japan’s neutral rate as being between 1.5% and 2.0%.

Historic Context

A hike in rates to 1.5% would push the BOJ’s policy target to levels unseen since 1995, when the central bank used the official discount rate as its main policy target.

Inflation Concerns

Japan’s core consumer inflation reached 3.0% in December, marking the fastest annual pace in 16 months. With inflation exceeding the BOJ’s 2% target for nearly three years, the case for raising still-low borrowing costs continues to strengthen.