(Feb 6): The Bank of Japan’s (BOJ) most hawkish board member Naoki Tamura flagged the need for two or more interest rate hikes by early next year to contain upside risks for prices.

“The short-term interest rate should be at the 1% level by the second half of fiscal 2025,” up from the current 0.5%, Tamura said on Thursday in a speech to local business leaders in Nagano, central Japan. “I think the bank needs to raise this rate in a timely and gradual manner, in response to the increase in the likelihood of achieving the price stability target.”

While Tamura is the leading advocate for rate hikes on the board, the speech is likely to further fuel market speculation that more rate hikes are in the pipeline, a day after solid wage data prompted yen strength on that assumption. 

The currency briefly strengthened to as much as to 151.82 against the dollar following Tamura’s comments, reaching a two-month high after trading around 152.30 shortly beforehand.

“His comments alongside the higher wage print on Wednesday added to conviction that further BOJ policy normalisation remains on track,” said Christopher Wong, a strategist at Oversea-Chinese Banking Corp (OCBC). That provides scope for further strengthening of the yen on policy divergence between the US Federal Reserve and the BOJ, Wong indicated.

Tamura reiterated his view that the neutral rate is at least 1%, and added that the rate needs to be raised to at least that mark by the second half of the fiscal year that ends in March next year. He also said the rate at 0.75% would still be clearly negative in real terms and still a long way from neutral, underscoring his view that there’s room for raising borrowing costs further. 

It is unclear how widely Tamura’s view is shared with the rest of the BOJ board. While Tamura said he expects the central bank’s stable inflation target to be reached by the second half of fiscal 2025, governor Kazuo Ueda last month said that he expects underlying inflation to reach 2% around fiscal 2026.

Tamura’s comments on Thursday followed the BOJ’s decision last month to raise its benchmark rate to 0.5%, and its pledge to raise rates further if its economic outlook is realised. 

Tamura, a former senior executive at Sumitomo Mitsui Financial Group, was the only person on the nine-member board to propose raising the policy rate in December, a month before the bank followed through with a rate hike in January. 

“Now is the time for the bank to ease off slightly from pressing hard on the accelerator of monetary easing,” Tamura said.

“Saying that the rate needs to be at least 1% suggests it could be higher,” said Masayuki Koguchi, an executive fund manager at Mitsubishi UFJ Asset Management. 

BOJ watchers expect another increase in borrowing costs around the middle of this year, with July being the most popular month. Some 45% of them see the rate change taking place in April in their risk scenario.  

During a press conference later on Thursday, Tamura refrained from being specific about the timing of the next hike, or the pace of future increases in borrowing costs. He said it can be faster or slower depending on economic data, and he doesn’t share a broad market view that it will come once every six months.

“It’s not like we have already decided on hiking once every half a year,” the board member said. 

Uploaded by Tham Yek Lee