Former Bank of Japan member: Interest rates will be raised to 1.5% during Kazuo Ueda's tenure or three more interest rate hikes

The Zhitong Finance App learned that Makoto Sakurai (Makoto Sakurai), a former Bank of Japan policy committee member, said on Monday that the Bank of Japan may raise interest rates three more times during the remaining term of Governor Kazuo Ueda until the beginning of 2028, raising interest rates to 1.5%.

Makoto 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% may occur around June or July next year.

In an interview, he said that further interest rate hikes may become more challenging as interest rates rise to bring borrowing costs closer to what is viewed as economically neutral and attract criticism from dovish Prime Minister Takaichi Sanae's inflationary advisors.

Sakurai Makoto, who is in close contact with current policymakers, said, “The Bank of Japan will not publicly say this, but it may regard 1.75% as an estimated neutral interest rate level. The rate hike to 1.5% will comfortably be below that level, and will still leave enough room for the Bank of Japan to cut interest rates if 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 interest rates twice in the next fiscal year beginning in April 2026.

Makoto Sakurai said that if uncertainty about the outlook for the US economy increases and domestic inflation slows significantly, the Bank of Japan may choose to raise interest rates only once in the 2026 fiscal year and postpone further rate hikes until 2027.

“The Bank of Japan may want to resume rate hikes at a pace of about once every six months. But it seems a bit concerned about the risk of resistance from the government,” he said. “This is probably the reason behind Ueda's previous vague communication with Kazuo.”

The Bank of Japan raised interest rates from 0.5% to 0.75% on Friday, bringing borrowing costs to a level not seen in 30 years, another milestone towards ending decades of huge monetary support.

The interest rate hike to 0.75% brought the Bank of Japan's policy interest rate closer to its estimate of the lower limit of the 1.0% to 2.5% range of Japan's neutral interest rate (that is, the interest rate that neither cools down nor stimulates the economy).

Although Kazuo Ueda said that policy interest rates are still a bit far from reaching the lower limit of the estimated range, he did not specify how many interest rate hikes would actually be needed to bring interest rates to a neutral level.

Government spending plans can backfire

The yen was sold off because the market believed that the Bank of Japan was not in a hurry to raise interest rates further. This led the government, which is concerned about the effects of inflation caused by a weak local currency, to issue a warning to intervene to buy yen.

Sakurai Makoto said that the Bank of Japan may have obtained approval from Sanae Takaichi and Minister of Finance Katayama Satsuki in promoting policy normalization, including raising interest rates to 0.75% last Friday.

“As long as the Prime Minister and Finance Minister agree, there should be no problem with the Bank of Japan raising interest rates,” he said. “But as interest rates get closer to neutral levels, things could get complicated.”

Japan's inflation rate has continued to exceed the Bank of Japan's 2% target for nearly four years as companies pass on rising raw material costs and continue to raise wages to cope with labor shortages.

Makoto Sakurai pointed out that the Bank of Japan's “short-sighted” survey shows that companies expect the inflation rate to reach 2.4% in one, three, and five years from now — which indicates that inflation is becoming entrenched in the Japanese economy.

He said that Takaichi Sanae's large-scale spending plan aimed at mitigating the impact of rising living costs on households may backfire due to accelerated inflation.

The current administration's expansionary fiscal policy also risks eroding market confidence in Japan's finances, triggering a sharp rise in bond yields and an unsatisfying fall in the yen.

“The yen weakened even after the Bank of Japan raised interest rates in December, which indicates that the currency's weakness is more driven by market concerns about Japan's fiscal policy,” Sakurai said.

Under Kazuo Ueda's leadership, the Bank of Japan withdrew from a decade-long large-scale stimulus policy last year and raised interest rates three times (including raising interest rates to 0.75% last week), based on the view that Japan is making progress in achieving the 2% inflation target on a lasting basis. His five-year term ends in April 2028.