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Hawkish Bank of Japan policymaker calls for more rate hikes

Hawkish Bank of Japan policymaker calls for more rate hikes

Japanese national flag hoisted atop the Bank of Japan headquarters building is seen between traffic signals in Tokyo, Japan, on Jan 23, 2025. (Photo: REUTERS/Issei Kato)

The Bank of Japan should lift interest rates closer to levels deemed neutral to the economy given mounting inflationary pressures, hawkish board member Naoki Tamura said on Thursday (Oct 16).

While uncertainty remains over the global economic outlook, there is a strong possibility that the slowdown in overseas growth will not be as significant as initially thought, he said.

Inflationary pressures, on the other hand, have increased and heightened the chance Japan will durably achieve the BOJ's 2 per cent inflation target earlier than expected, Tamura said in a speech.

The remarks increase the likelihood that Tamura, who unsuccessfully proposed raising interest rates to 0.75 per cent from 0.5 per cent in September, will do so again at the next policy meeting on October 29-30.

Given there are both upside and downside economic risks, the BOJ does not need to immediately raise interest rates to levels that restrict growth, Tamura said.

"That said, with risks to prices becoming more skewed to the upside, the BOJ is now in the phase of deciding on raising interest rates to levels a little closer to neutral," he said.

Starting to raise interest rates gradually now will prevent the BOJ from being forced to hike sharply in the future, Tamura said.

CONSUMER INFLATION HAS EXCEEDED TARGET

The BOJ exited a decade-long, massive stimulus last year and raised interest rates to 0.5 per cent in January on the view Japan was on the cusp of sustainably hitting its 2 per cent inflation target.

Consumer inflation has exceeded the target for well over three years and was at 2.7 per cent in August, but the BOJ has treaded cautiously in hiking rates as it focused on risk to Japan's export-reliant economy from US tariffs.

Tamura said he believed Japan's neutral interest rate, or the level that neither cools nor overheats growth, should be at least around 1 per cent.

Given the difficulty of precisely estimating the neutral level of rates, the only way to determine the right level is to raise rates gradually while scrutinising how the economy and prices respond, he said.

"The BOJ has so far raised the policy interest rate to 0.5 per cent, but my view is that the increase has had an extremely limited impact on Japan's economy," Tamura said.

"I believe that the policy interest rate is still far away from the neutral interest rate," he added.

Tamura and another board member, Hajime Takata, dissented from the BOJ's decision in September to hold interest rates steady.

While their views underscore a hawkish tilt in the nine-member board, Governor Kazuo Ueda has repeatedly called for going slow in raising rates due to uncertainty over the impact of US tariffs on Japan's economy.

Most analysts expect the BOJ to raise interest rates again by January next year, though they are divided on whether a hike could come in October, December or January.

Bets on an October rate hike receded after Sanae Takaichi, known as an advocate of aggressive monetary easing, won the ruling party's leadership race this month.

But there is uncertainty over whether she can win enough votes in parliament to be chosen as Japan's first female premier.

Source: Reuters/ec
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