The Bank of Japan will likely raise interest rates again around June or July, and seek to hike its policy rate to at least 1.5% in the next two years, former BOJ board member Makoto Sakurai said on Tuesday.
Broadening wage hikes, prospects of sustained price rises and Japan's solid economic growth give the central bank scope to continue raising interest rates steadily, said Sakurai, who retains close contact with incumbent policymakers.
"The BOJ will seize any opportunity to raise interest rates without much delay. That's the impression I got looking at how the BOJ hiked in January, instead of waiting until March," Sakurai told Reuters in an interview.
There is even a chance the BOJ could push forward the timing of its next rate hike to April, if it prefers to act before domestic political uncertainty heightens ahead of an upper house election likely to be held in July, he said.
"If the economy moves in line with forecast, the BOJ will probably raise rates to 0.75% around June or July. But the timing could be swayed by domestic politics," with Prime Minister Shigeru Ishiba's minority coalition suffering from a weak political standing and low approval ratings, Sakurai added.
The BOJ next meets for a policy meeting on March 18-19, followed by one on April 30-May 1 when it will issue fresh quarterly growth and inflation forecasts.
The BOJ last year made a landmark exit from a decade-long stimulus and raised short-term rates to 0.25% on the view Japan was on the cusp of sustainably achieving its 2% inflation goal.
It raised rates again on Friday to 0.5%, a level unseen in Japan since the 2008 global financial crisis, in a sign of its conviction that wage and price increases will broaden.
Governor Kazuo Ueda said the central bank will keep raising rates if the economy continues to recover, though offered few clues on the timing and pace of future rate hikes.
BOJ executives probably want to raise short-term rates at least to 1.5% by the end of fiscal 2026, so they have scope to reduce borrowing costs when the economy faces another downturn, Sakurai said.
"While Japan's nominal neutral rate could be somewhat higher, a hike to 1.5% would allow the BOJ to argue it is still supporting a fragile economy with some degree of accommodation," he said.
"If markets turn volatile or Japan's economic uncertainty heightens, the BOJ could put off hiking. Otherwise, it is likely to raise rates about twice a year in the coming two years."
The BOJ staff has produced estimates showing Japan's nominal neutral rate to be in a range of 1%-2.5%. Ueda has said the neutral rate was too hard to pin down real-time, though many analysts see the neutral rate as somewhere around 1%.
Sakurai said the BOJ executives probably see Japan's neutral rate as being somewhere around 1.5%-2.0%.
Japan's core consumer inflation hit 3.0% in December, marking the fastest annual pace in 16 months. It has exceeded the BOJ's 2% target for nearly three years, heightening the case for the central bank to raise still-low borrowing costs.
