Bank of Japan Expected to Raise Interest Rates

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) – The Bank of Japan (BOJ) is anticipated to hike interest rates again around June or July as former BOJ board member Makoto Sakurai suggests the central bank aims to triplicate its policy rate to at least 1.5% within the next two years.

Sakurai notes that increasing wages, sustained price rises, and Japan’s robust economic growth provide the BOJ with the capacity to raise rates gradually. Recently, the BOJ raised short-term interest rates to 0.5% from 0.25%, amid ongoing uncertainty regarding the economic impact of U.S. President Trump’s policies.

“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 rather than waiting until March,” Sakurai told Reuters in an interview.

An earlier rate hike could take place in April, ahead of a domestic political environment likely to intensify with an upper house election in July. Sakurai predicts, “If the economy performs as expected, the BOJ will likely raise rates to 0.75% around June or July,” though domestic politics might influence the timing.

Upcoming BOJ policy meetings are scheduled for March 18-19 and April 30-May 1, when new quarterly growth and inflation forecasts will be released. The BOJ had previously exited a decade-long stimulus program, raising short-term rates to 0.25% based on the belief that Japan was nearing its 2% inflation target sustainably. The most recent rate increase to 0.5% is the highest since the 2008 financial crisis, indicating the BOJ’s confidence in broadening wage and price increases.

Governor Kazuo Ueda remarked that the central bank will persist in raising rates if the economy continues to recover, though he provided scant details on future rate hike timelines. Sakurai believes that BOJ executives aim to elevate short-term rates to at least 1.5% by the end of fiscal 2026, enabling them to lower borrowing costs if economic conditions worsen, indicating that pushing rates to this level would allow the BOJ to claim it still supports a fragile economy.

If market volatility or economic uncertainty emerges, a planned rate hike could be delayed. However, forecasts indicate BOJ could raise rates approximately twice a year for the next two years.

Estimates of Japan’s nominal neutral rate are between 1%-2.5%; however, Ueda suggests this rate is challenging to determine in real-time, although many analysts estimate it around 1%. Sakurai notes that BOJ executives likely view the neutral rate at 1.5%-2.0%.

Raising rates to 1.5% would set the BOJ’s policy target at levels not seen since 1995, at which time the official discount rate (ODR) was the main policy target, contrasting with the current overnight call rate used.

Japan’s core consumer inflation hit 3.0% in December, the fastest annual growth in 16 months, consistently exceeding the BOJ’s 2% target for nearly three years, strengthening the case for increasing borrowing costs.