Source: Golden Ten Data
Author: Xiao Yanyan
The Bank of Japan's former chief economist said that the Bank of Japan has sent out an important message that observers should keep in mind!
According to a former Bank of Japan chief economist, the Bank of Japan may raise interest rates as many as three more times this year. Given that its “excessively” loose interest rate settings still have plenty of room for adjustment, the next rate hike may be as early as June.
Toshitaka Sekine, an economist and former head of research at the Bank of Japan, said on Wednesday: “This may sound extreme, but if interest rates were raised in June, there would be no problem. There is no need to draw a conclusion that interest rates will not be raised.”
Compared to most BOJ observers, Sekine's views are more hawkish, although a growing number of analysts have pointed out the risk of a July rate hike, as the rising yen increases the risk of a higher price trend.
Sekine believes that the Bank of Japan will adopt an opportunistic policy and gradually reduce the easing policy settings as much as possible while real interest rates are still drastically negative. Sekine, who is currently a professor of economics at Hitotsubashi University in Tokyo, said:
“My feeling is that as long as the conditions are favorable enough, there is no problem even if they raise interest rates three more times this year. There is no need to say that 0.25% is the limit, or that the central bank will hit a wall when it reaches 0.5%. They can gradually raise interest rates as long as the environment allows.”
Bloomberg conducted a survey of economists before the Bank of Japan policy meeting on April 25-26. Their median year-end forecast for the benchmark interest rate was 0.25%, which indicates that most people expect the Bank of Japan to raise interest rates once again after the first rate hike since 2007 in March.
Sekine isn't the only one more hawkish than the market. Vanguard Group Inc. (Vanguard Group Inc.) expects the Bank of Japan's key interest rate to rise to 0.75% before the end of the year, and Pacific Investment Management Co. (Pacific Investment Management Co.) said it is possible to raise interest rates three times this year.
Sekine said that it is difficult to determine the exact location of the neutral interest rate, but if the neutral interest rate is assumed to be around 0% (as various estimates show) and the inflation rate is 2%, this means that the nominal neutral interest rate is around 2%.
The summary of the Bank of Japan's April policy meeting showed hawkish tendencies within policymakers. One of the members said that the interest rate path may be higher than the market's current expectations. Following the release of the summary, the Bank of Japan decided to cut back on bond purchases this week, fueling speculation that the Bank of Japan is preparing to move ahead of schedule.
Sekine said that the Bank of Japan may think that if the yen starts to disrupt price trends, then it is also necessary to raise interest rates because Japanese companies have begun to change their price setting behavior to deal with inflation, and this situation is more likely to happen than in the past.
Those who predict a gradual pace of interest rate hikes often support their position by citing the fragility of economic recovery. A government report on Thursday showed that Japan's economy contracted in the first quarter, while the data for the end of 2023 was lowered to no growth. The Japanese economy has not expanded since the April to June 2023 quarter.
Despite this, Sekine said that signs of weak economic recovery are unlikely to cause the Bank of Japan to deviate from the trajectory of raising interest rates because the output gap is already around 0%, and economic contraction will not have a significant impact on measuring the strength of monetary easing policies.
The Bank of Japan last month predicted that consumer prices, excluding fresh food and energy, will rise 2.1% in the fiscal year beginning in April 2026. Sekine said that this is an important message from the Bank of Japan, and Bank of Japan observers should keep in mind because the authorities are hinting at the need to raise interest rates.
“Nothing is predetermined,” Sekine said. “Within common sense, they will take an opportunistic approach to gradually raise interest rates.”
Editor/Jeffy