By Leika Kihara and Takahiko Wada

TOKYO/MATSUMOTO (Reuters) – The Bank of Japan must raise interest rates to at least 1% by the second half of the fiscal year beginning in April, hawkish board member Naoki Tamura said on Thursday. His remarks pushed up the yen and reinforced bets of a near-term rate hike.

Inflationary Risks
Tamura indicated that inflationary risks are building as companies pass on rising raw material and labor costs. This necessitates lifting the BOJ’s policy rate to levels considered neutral for the economy. He believes Japan’s neutral rate is at least 1% and anticipates rates must reach this level by the latter half of fiscal 2025. The outcome of annual wage negotiations may confirm broad-based pay increases, including for small firms.

> “If short-term interest rates stay below the level of the neutral interest rate, this will further push up inflation,” said Tamura in a speech to business leaders in Nagano.

The dollar fell briefly to a two-month low of 151.81 yen following Tamura’s comments, as markets priced in a near-term rate hike. The two-year Japanese government bond yield reached 0.765%, the highest since October 2008, indicating about a 50% chance of another rate hike in July.

Inflation Expectations
Tamura, considered the board’s most hawkish member, noted inflation expectations among firms and households have likely reached 2%. However, he cautioned that the BOJ must carefully time its rate hikes, considering the long-term experience of the Japanese public with ultra-low rates.

> “Bearing in mind that short-term interest rates should be at 1% by the second half of fiscal 2025, I think the Bank needs to raise rates in a timely and gradual manner,” he remarked.

He also mentioned that even if the policy rate were raised to 0.75%, real interest rates would remain significantly negative, indicating that there’s still a long way to go before achieving levels that would cool economic growth:
> “Now is the time for the Bank to ease off slightly from pressing hard on monetary easing.”

Future Rate Hikes
Tamura did not specify how soon the BOJ might tighten policy again, noting,
> “There is no such preconception that interest rates should be raised every half a year.”

He emphasized that the BOJ would carefully assess economic conditions before determining the timing of rate hikes. Last month, the BOJ raised interest rates to 0.5%, the highest since the 2008 financial crisis, as it is confident Japan is on track to achieve its 2% inflation target sustainably.

BOJ Governor Kazuo Ueda has indicated he is ready to continue raising rates if sustainable wage gains boost consumption and allow firms to raise prices. However, Ueda has not specified Japan’s exact neutral rate.

Shift from Previous Policies
Tamura’s comments follow recent data showing a trend of wage hikes and underscore the BOJ’s gradual departure from the extensive stimulus measures by former Governor Haruhiko Kuroda aimed at fuelling growth. In a review released in December, the BOJ recognized the positive impact of its past monetary easing. Nevertheless, Tamura expressed skepticism regarding the overall positive effect of massive stimulus and emphasized the need to examine potential future side effects, such as significant yen depreciation.