BOJ likely eyeing steady rate hikes, says ex-central bank executive Maeda

By Thomson Reuters May 9, 2024 | 11:58 PM

By Leika Kihara and Yoshifumi Takemoto

TOKYO (Reuters) – The Bank of Japan will likely raise interest rates again as early as July and keep hiking borrowing costs next year and beyond if the economy sustains a moderate recovery, former central bank executive Eiji Maeda told Reuters.

The central bank is also expected to reduce its bond buying sometime later this year from the current pace of roughly 6 trillion yen ($38.5 billion) per month, Maeda said in an interview on Friday.

“Judging from its communication in April, it’s clear the BOJ is eyeing more rate hikes,” he said, adding the first increase could come anytime between July and October.

“From next year, the BOJ will probably keep raising rates once every six months. Depending on economic and price developments, it may at times quicken the pace to around once a quarter,” said Maeda, who as the BOJ’s executive director oversaw its policy drafting until 2020.

In March, the BOJ ended eight years of negative interest rates and other remnants of its radical stimulus on prospects that rising wages will underpin consumption, and keep inflation durably around its 2% target.

The central bank signalled the chance of further rate hikes last month when it produced fresh quarterly forecasts that projected inflation staying near its 2% target in coming years.

Governor Kazuo Ueda said last month he expects short-term rates to rise near Japan’s “neutral interest rate”, or the rate at which monetary policy is neither contractionary nor expansionary, around late 2025 through 2026.

Based on staff estimates on Japan’s neutral rate of interest released in its quarterly report, the BOJ likely sees scope to eventually raise short-term rates to around 1.75%, Maeda said.

That means the BOJ will probably hike rates steadily in coming years from the current levels around zero, if economic and price developments move in line with its forecasts, he said.

“Japan’s economy is likely to continue recovering gradually unless the global economy deteriorates sharply,” as moderating cost-push inflation is seen supporting consumption, said Maeda, who retains close contact with incumbent officials and has deep knowledge on the thinking behind the BOJ’s crafting of policy.

Maeda said the BOJ likely will not raise rates for the sole purpose of slowing the yen’s declines. But he said the impact of yen moves on Japan’s prices may have become bigger than in the past, when the economy was mired in deflation or low inflation.

“From this perspective, the impact a weak yen could have on inflation is important in guiding monetary policy,” he said.

($1 = 155.7300 yen)

(Reporting by Leika Kihara and Yoshifumi Takemoto; Editing by Jamie Freed)