(Oct 21): The Bank of Japan (BOJ) will probably keep raising interest rates every three months to contain risks of inflation deviating from its stable price target, according to a former BOJ executive director who oversaw monetary policy.

“I expect the next rate hike in December, followed by another in March or April,” Eiji Maeda said in an interview on Tuesday. “The pace has now accelerated to roughly one hike every three months, and I think that’s appropriate.”

It is also broadly in line with market pricing. The overnight swaps market implies investors see a roughly 80% chance of an increase by December. The BOJ is widely expected to hold rates steady at its next policy meeting on Oct 30. 

The bank’s hikes last month and in June amounted to its fastest pace since 1990. They were delivered against a backdrop of accelerating consumer prices, and yen weakness that triggered a joint intervention by Tokyo and Washington, and US pressure for tighter monetary policy. 

Maeda, who led the BOJ’s initial response to the Covid pandemic, doesn’t completely rule out the idea that the bank may in future opt to hike in successive meetings, in circumstances such as a sharp depreciation of the yen. But he said it doesn’t seem likely at this point. 

“If the BOJ delivers back-to-back hikes, markets may increasingly expect another consecutive move, and that carries significant risk,” Maeda said. “That gives the BOJ reason to avoid hiking at consecutive meetings.”

A key focus of the October meeting is whether governor Kazuo Ueda’s board will judge that underlying inflation has hit its 2% target for the first time since the goal was set in 2013.   

“I don’t expect the BOJ to go so far as to clearly say that the 2% price stability target has been achieved,” Maeda said. “But it wouldn’t be surprising if it moved its assessment forward somewhat.” 

Data due out Friday is expected to show headline inflation climbed to 2.1% in September, while a core rate that strips out fresh food and energy accelerated to 2.3%.

Ueda said last week that the bank can no longer tolerate a rise in underlying inflation because it’s very close to the target, an indication of his backing for further rate hikes. 

Japan is emerging from a long period of deflationary pressures. While underlying inflation can now finally be assessed as being around 2%, the bank’s mission isn’t accomplished, as the goal is to make inflation stabilise around that level, people familiar with the matter told Bloomberg.

Still, it would be a signal for a December hike if the bank judges the price trend is around its goal while financial conditions remain accommodative next week, said Maeda, who is now president of the Chibagin Research Institute.

The September rate increase brought the BOJ’s policy rate to 1.25%, entering its estimated range of a neutral rate between 1.1% and 2.5% for the first time. The neutral rate is the level that is neither stimulative nor restrictive to the economy. Maeda said the BOJ may eventually be forced to lift its benchmark rate to 2.25%, which would essentially mean four more hikes.

“If the midpoint of around 1.75% is taken as one benchmark, the policy rate would reach neutral around next spring,” said Maeda, who was also the chief economist of the BOJ. From around that time on, “policy decisions — and explaining them — may become more difficult.” 

Uploaded by Tham Yek Lee