Bank of Japan may raise interest rates twice by March, says ex-official
Former BOJ board member Makoto Sakurai sees potential hikes in October and March as inflation pressures mount from the Iran conflict
The Bank of Japan could raise interest rates twice by the end of the current fiscal year after shifting its policy focus toward controlling mounting inflation risks, according to former board member Makoto Sakurai.
The central bank raised its short term policy rate to 1% on Tuesday, its highest level in 31 years, as it sought to prevent underlying inflation from exceeding its 2% target.
The decision marked a shift from previous increases, which the BOJ had framed as evidence that Japan was moving toward sustainably achieving its inflation goal.
Sakurai said the latest move showed that policymakers were becoming more concerned about inflation overshooting the target and were increasingly focused on containing price pressures.
He expects another rate increase in October or December, with the timing likely to depend on consumer inflation data between July and September.
A further increase by the end of the fiscal year in March 2027 could follow if inflation accelerates more sharply than expected.
If price growth remains within the BOJ’s forecasts, the central bank may wait until December before acting again to avoid placing excessive pressure on asset prices.
Sakurai said strong corporate profits and a tight labor market mean inflation risks are likely to outweigh the threat of an economic downturn.
He expects the policy rate to reach around 2% by early 2028, when Governor Kazuo Ueda’s term ends.
Higher energy costs linked to conflict in the Middle East have complicated the outlook by adding to inflation while weighing on Japan’s oil dependent economy.
A weak yen has also increased import costs and contributed to broader price pressures.
Sakurai said interest rate increases or currency market intervention are unlikely to reverse the yen’s weakness, which he linked largely to concerns over Prime Minister Sanae Takaichi’s expansionary fiscal policy.
The administration has approved a 3 trillion yen extra budget funded through additional debt and has introduced subsidies to reduce fuel costs.
Sakurai warned that another supplementary budget could worsen concerns about Japan’s public finances, potentially leading to a credit rating downgrade and further pressure on the yen.
He said the conflict between the BOJ’s efforts to control inflation and the government’s expansionary fiscal policy remains a key obstacle to stabilizing the currency.