BOJ Board Member Adds to Signals Pointing to Interest Rate Hikes

Bank of Japan board member Kazuyuki Masu has called for timely interest rate hikes to prevent underlying inflation from exceeding the 2% target. His remarks, delivered during a speech in Matsuyama, add to growing hawkish sentiment within the central bank’s nine-member board. Masu emphasized the importance of continuing policy rate hikes to complete the normalization of monetary policy in Japan.

Masu noted that Japan is clearly entering an inflationary phase, with core consumer inflation hitting 2.4% in December. While the Bank of Japan has kept interest rates steady in January, it retains hawkish inflation forecasts and signals readiness to increase borrowing costs further. The board has already raised the short-term policy rate to 0.75% from 0.5% in December.

Markets are pricing in a roughly 60% chance of another rate hike in April, driven by renewed depreciation of the yen. The weak yen amplifies import costs, adding to inflationary pressure. Masu warned that attention must be paid to whether inflation triggered by the yen's slide could heighten inflation expectations and, in turn, affect underlying inflation.

Why Did This Happen?

The call for rate hikes reflects a broader shift in Japan’s economic landscape. Sustained wage increases, persistently high food prices, and a weak yen are fueling inflation. Masu pointed to processed food prices as a key determinant of future inflation, noting that surging rice prices may have made consumers more receptive to other price increases.

Japan’s underlying inflation remains below 2%, but it is drawing close to that level. The Bank of Japan must ensure that inflation stays within target through timely and appropriate rate hikes. However, Masu also emphasized the need to proceed cautiously, as excessive rate hikes could disrupt the virtuous cycle of moderate price and wage increases.

How Did Markets React?

The yen has faced renewed depreciation, which has raised concerns about its impact on inflation. The USD/JPY pair was down 0.28% on the day of Masu’s comments. Market participants are closely monitoring the BOJ’s next move, particularly as Governor Kazuo Ueda has reiterated the need for caution in rate hikes.

Government spending plans have also drawn attention. Toshihiro Nagahama, a government panel member known for advocating reflationary policies, has stressed the need for fiscal discipline to avoid triggering a bond selloff. His remarks highlight the government’s sensitivity to bond market reactions, especially after a recent policy shift caused super-long Japanese government bond (JGB) yields to hit record highs.

What Are Analysts Watching Next?

Analysts are closely watching whether inflation in Japan is driven purely by supply-side factors or by a combination of supply and demand. This distinction could influence the BOJ’s approach to rate hikes and monetary normalization. Japan's real interest rate remains deeply negative, and the neutral rate estimate is only one reference in setting monetary policy.

The BOJ must also examine the broader economic and financial market conditions as its policy rate nears the estimated neutral range. This includes monitoring wage growth, inflation expectations, and the behavior of financial markets.

Investors are advised to keep a close watch on the BOJ’s upcoming policy meetings and inflation reports. The central bank’s cautious approach to rate hikes and its commitment to maintaining economic stability will be key factors shaping Japan’s monetary policy path in the coming months.