Source: Caixin.
Author: Huang Junzhi.

Former Bank of Japan official and one of Japan's leading inflation experts Tsutomu Watanabe stated that the Bank of Japan should strive to better communicate its intention to raise interest rates, in order to ensure that the market does not panic if the pace of rate hikes is faster than many people's current expectations.

This professor of economics at the University of Tokyo said, "The speed of interest rate hikes in Japan may be faster than expected by everyone. There may be two more rate hikes this year."

Watanabe said that the reason for the Bank of Japan's interest rate hike on July 31 did not match the price trend at the time, indicating that the authorities did so intentionally in order to create policy buffers for potential economic downturns and normalize the economy as soon as possible.

He further explained that although the price trend is not strong, the Bank of Japan believes that inflation is "getting on track," which means that the central bank can basically take action at any time.

"Creating positive interest rates is in the DNA of the Bank of Japan, and as a former official, I may also have this DNA," he said. "Raising interest rates to make room for negative economic shocks is not unfounded, but they should communicate this intention."

In July of this year, the Bank of Japan raised the benchmark interest rate from the range of 0% to 0.1% to 0.25%, marking the second rate hike this year. This accelerated the rebound of the yen and led to a market crash in Japan, with the Nikkei index plummeting more than 12% on August 5, subsequently causing a global market meltdown. This was another "Black Monday" that panicked investors.

Before that, Watanabe believed that there was "absolutely" no possibility of a rate hike, as data showed that consumer spending remained fragile due to inflation stickiness. Bank of Japan Governor Haruhiko Kuroda stated in a recent document that the economic and price trends align with the bank's projected outlook, and that there is an upward risk to prices, which led to the decision to raise rates in July.

Watanabe believes that the Bank of Japan's interest rate hike is partly to align with the market's pricing of its rate path, but the Bank of Japan should be more proactive in conveying its view on the rate path.

He suggested that one option to enhance communication is for the Bank of Japan to prepare a "dot plot" similar to the one released quarterly by the Federal Reserve. Watanabe said that even if the outlook proves to be wrong, the Bank of Japan will not lose credibility.

Overall, the Bank of Japan has maintained a hawkish stance after triggering a "Black Monday" in early August. The latest statement by Ueda Kazuo stated that if the economy and prices perform as expected, the Bank will continue to raise interest rates.

In addition, the latest data released last Friday showed that Tokyo's inflation in August accelerated, providing more confidence for the Bank of Japan to continue normalizing its policy by raising interest rates.

At the end of last month, Deputy Governor Himeji Nozomitsu of the Bank of Japan also stated that if Japan's inflation and economic data continue to meet the central bank's expectations, the Bank of Japan will continue to raise interest rates.

Editor/rice