Government Panel Member Urges BOJ to Anchor Inflation Expectations Around 2%

A former Bank of Japan deputy governor urged the central bank to stabilize long-term inflation expectations around 2%. Masazumi Wakatabe, currently a member of a key government panel, made the remarks during a meeting last month. He emphasized the need for the BOJ to guide monetary policy to maintain market trust in Japan's financial stability.

Wakatabe noted that inflation is expected to moderate in 2026 as cost-push factors ease and real wages turn positive. However, he warned of risks unique to an inflationary environment, such as rising interest rates and increased borrowing costs.

Japanese government bond yields have been on an upward trajectory, partly due to concerns over Prime Minister Sanae Takaichi's expansionary fiscal policies. Wakatabe's comments reflect growing caution among even reflationist advisers about the potential consequences of high debt levels and market pressures from bond investors.

Why the Move Happened

Wakatabe's remarks align with the BOJ's recent shift toward a tighter monetary policy. In December, the BOJ raised its short-term policy rate to a 30-year high of 0.75%, signaling a step toward phasing out stimulus measures. He argued that maintaining long-term inflation expectations at 2% is critical for economic stability.

The former deputy governor also highlighted Japan's unique economic challenges. With stubbornly high food prices, inflation has remained above the 2% target for nearly four years. As the output gap improves, he suggested the economy could show signs of growth in 2026.

How Markets Responded

Market reactions to Wakatabe's comments were mixed. Bond yields have already reflected expectations of higher interest rates and a weaker yen. Analysts at MUFG noted that Governor Kazuo Ueda reiterated a hawkish stance, reinforcing expectations of further rate hikes.

The yen has been under pressure, with USD/JPY trading near recent highs. The weak yen increases pressure on the BOJ to raise rates, while the government faces potential pressure to intervene in foreign exchange markets.

Wakatabe's call for fiscal discipline also added to the discussion on Japan's debt sustainability. He suggested the government should focus on reducing the debt-to-GDP ratio rather than maintaining a primary balance target. This contrasts with his earlier proposal to abandon the primary balance target.

What Analysts Are Watching

Investors are closely watching for further signals from the BOJ and the government. Wakatabe's panel is set to oversee the government's long-term fiscal blueprint, expected around June. The panel includes a mix of reflationist and more fiscally conservative voices, suggesting potential policy tensions.

Analysts also highlighted the risks of bond market volatility. Rising yields reflect investor concerns over Japan's debt levels and the likelihood of continued interest rate hikes. Wakatabe's remarks suggest that even within a reflationist framework, fiscal discipline remains important.

Looking ahead, the BOJ's policy path will be crucial for Japan's economic trajectory. With inflation still above target and external pressures mounting, the central bank faces a delicate balancing act. Investors will be watching for further clarity on the pace of rate hikes and the central bank's commitment to stabilizing inflation expectations.