BOJ Rate Hike Imminent? Hawkish Board Member Calls for At Least 1% Interest Rate By Mid-2025

The Bank of Japan (BOJ) may be moving towards a quicker tightening of monetary policy, according to remarks made by board member Naoki Tamura. As reported by Reuters, Tamura, often viewed as the most hawkish member of the board, called for raising interest rates to at least 1% by the second half of fiscal 2025. His comments sent the yen higher, as markets adjusted to the prospect of a near-term rate hike.

Tamura, speaking at a meeting with business leaders in Nagano Prefecture on Thursday, cited mounting inflationary pressures as the primary driver for the BOJ's need to raise rates. He pointed to companies continuing to pass on rising raw material and labor costs, signaling a broadening of inflationary forces.

“If short-term interest rates stay below the level of the neutral interest rate, this will further push up inflation,” Tamura stated in his speech.

He asserted that Japan’s neutral interest rate, the level at which monetary policy is neither stimulative nor restrictive, is at least 1%. Achieving this level, he argued, necessitates rate hikes by the latter half of fiscal 2025, when the outcome of annual wage negotiations will likely confirm broad-based pay increases, including for smaller firms.

The dollar weakened significantly against the yen following Tamura’s remarks, as markets began to recalibrate their expectations for BOJ policy. The two-year Japanese government bond (JGB) yield also climbed to its highest level since October 2008, reaching 0.765%. Markets are now pricing in roughly a 50% chance of another rate hike in July.

Tamura, a former commercial banker, emphasized that inflation expectations among firms and households have likely already reached 2%. However, he stressed the importance of careful timing for BOJ rate hikes, given the potential impact on the Japanese public, who have long been accustomed to 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, in response to the increasing likelihood of achieving its price target," he said.

Despite his call for a 1% rate target by mid-2025, Tamura declined to specify the exact timing of future rate hikes. He acknowledged that the central bank will closely scrutinize economic, price, and financial data before making any decisions.

The BOJ raised interest rates last month to 0.5%, their highest level since the 2008 global financial crisis, signaling its belief that Japan is on track to achieve its 2% inflation target sustainably. Governor Kazuo Ueda has indicated a willingness to continue raising rates if sustained wage gains support consumption and enable firms to maintain price increases. However, he has refrained from specifying a precise level for Japan's neutral rate.

Tamura’s comments follow recent data revealing broadening wage hikes, including a Wednesday survey showing a steady increase in base salary in December. These developments underscore the BOJ's gradual shift away from the radical stimulus policies of former Governor Haruhiko Kuroda, which focused on revitalizing sluggish growth.