A former Bank of Japan official said that the Bank of Japan might raise interest rates four times by 2027.
According to a former executive director of the Bank of Japan, the policy path of Kazuo Ueda, Governor of the Bank of Japan, may include raising interest rates four times by 2027, three of which would be after next week’s highly anticipated rate hike. Former Bank of Japan official Hideo Hayakawa said in an interview on Wednesday: “They may feel that they are completely behind the curve. Kazuo Ueda might signal that even if rates are raised this time, it does not mean the end of the cycle.”
Hayakawa made these remarks as the market widely expects the Bank of Japan to raise borrowing costs to 0.75% on December 19, which would be the first rate hike since January. The main focus of this interest rate meeting will be how the Bank of Japan defines its future policy direction.
Hayakawa said: “They may return to a pace of raising interest rates approximately every six months.” He believes that the terminal rate may be around 1.5%, which means that three more rate hikes will be needed in addition to next week’s expected increase.
For those following the Bank of Japan, the key question is whether the central bank will provide any guidance on Japan’s neutral interest rate. The neutral interest rate refers to the level that neither stimulates nor restricts economic activity. The Bank of Japan has previously stated that this level lies between 1% and 2.5%.
Hayakawa stated that authorities may narrow the forecast range for interest rates based on updated data, but he expects more information to be released in January when the Bank of Japan updates its quarterly economic outlook.
Hayakawa, who has known Kazuo Ueda for over 40 years, noted that Ueda was almost unequivocal in his comments about next week's meeting, with a series of remarks collectively sending a strong signal. Kazuo Ueda stated that the authorities would make the right decision on whether to raise interest rates, and even if rates were raised, policy conditions would remain accommodative—seemingly aiming to preemptively avoid criticism that his policy stance might differ from the government’s fiscal approach.
Hayakawa pointed out: “Kazuo Ueda has almost explicitly indicated that there will be a rate hike.” He also noted that some believe it would make more sense to wait until January to decide whether to raise rates, allowing relevant departments to gather more data on the momentum of next year’s wage increases.
Hayakawa stated that the delay in this rate hike should not be attributed to the Bank of Japan, as the central bank must closely monitor many uncertainties related to Trump’s tariff measures and the timing of Sanae Takagi’s assumption of office as Japan’s new prime minister.
Hayakawa, who served as the chief economist of the Bank of Japan, warned that Sanae Takagi’s expansionary fiscal policy could force the Bank of Japan to accelerate the pace of rate hikes and push up the terminal rate. Last month, Takagi introduced a stimulus package with new spending exceeding economists’ expectations.
Hayakawa stated that Sanae Takamichi is creating massive fiscal debt in an attempt to stimulate an economy that does not lack demand, and her fiscal spending aimed at alleviating inflationary pressures is more likely to ultimately exacerbate price pressures. Hayakawa added, “This is quite risky. On top of that, Kazuo Ueda may feel that he is already behind the curve.”
Editor/melody