BOJ Could Raise Interest Rates as Early as June, Says Former Chief Economist - Latest Global News

BOJ Could Raise Interest Rates as Early as June, Says Former Chief Economist

The Bank of Japan could raise its key interest rate up to three more times this year, with the next move possibly coming as soon as June, given how much room it has to adjust its “overly” loose interest rates, according to a former BOJ official. Chief Economist.

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(Bloomberg) — The Bank of Japan could raise its key interest rate up to three more times this year, with the next move possibly coming as soon as June, given what scope there is to adjust its “overly” accommodative settings, sources said it is a former BOJ chief economist.

“It may sound extreme, but it’s OK if it happens in June,” economist Toshitaka Sekine said in an interview with Bloomberg on Wednesday, referring to a rate hike. “You don’t have to conclude that there won’t be one.”

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Sekine’s views are more hawkish than those of most BOJ watchers, although a growing number of analysts have pointed to the risk of a rate hike in July as the weakening yen raises the risk of a rising price trend. Sekine believes the BOJ will adopt an opportunistic monetary policy approach, gradually tapering its accommodative interest rates where possible, while real interest rates remain significantly negative.

“In my opinion, there is no problem at all even if interest rates are raised three more times this year, provided conditions are sufficiently favorable,” said Sekine, currently an economics professor at Hitotsubashi University in Tokyo. “You don’t have to say that 0.25% is the limit, otherwise the bank will reach its limits if it is at 0.5%. As long as the environment allows, they can simply increase interest rates gradually.”

In a Bloomberg survey of economists conducted ahead of the April 25-26 policy meeting, the average year-end estimate for the federal funds rate was 0.25%, suggesting most expect another rate hike after The BOJ made its first interest rate hike since 2007 in March by raising the benchmark to a range of 0% to 0.1%.

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Sekine isn’t alone in being more aggressive than the broader market. Vanguard Group Inc. expects its key interest rate to rise to 0.75% by year-end, and Pacific Investment Management Co. says three quarter-point rate hikes are on the horizon this year.

It is difficult to determine exactly where the neutral rate is, but assuming that the neutral rate is around 0%, as various estimates suggest, and inflation is at 2%, that would mean that the nominal neutral interest rate is about 2%, Sekine said.

The summary of the Bank of Japan’s policy meeting in April suggested a hawkish stance was emerging among its nine-member board. One member suggested that interest rates could be higher than the market is currently expecting. The release of the summary followed the BOJ’s decision to reduce the size of its bond purchases this week, fueling speculation that the BOJ is preparing to make a move soon.

The BOJ likely expects a higher interest rate will also be necessary if the yen begins to disrupt the price trend, an outcome that is more likely to occur than in the past as Japanese companies have begun to change their pricing behavior to to deal with inflation, he said.

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Those who predict only a gradual pace of rate hikes often cite the fragility of the economic recovery to support their position. A government report on Thursday showed Japan’s economy contracted in the first quarter, while data for the end of 2023 was revised downward to show no growth. The economy has not grown since the April-June quarter of 2023.

Still, signs of a weakening recovery are unlikely to dissuade the BOJ from the path of rate hikes, as the output gap is already around 0% and a decline would not make a significant difference in measuring the extent of monetary easing, Sekine said.

The BOJ forecast last month that consumer prices excluding fresh food and energy would rise 2.1% in the fiscal year from April 2026. That’s an important message from the bank that BOJ watchers should keep in mind as authorities point out the need for the rate to be higher, Sekine said.

“There is nothing predetermined,” Sekine said. “As a matter of common sense, they will gradually increase interest rates by taking an opportunistic approach.”

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