BOJ could raise rates every quarter, ex-policymaker says

Former Bank of Japan board member Makoto Sakurai anticipates the central bank will raise interest rates quarterly, aiming for a 2 per cent target by June next year. The recent increase to 1.25 per cent in September signifies a shift in focus towards combating inflation stemming from soaring fuel costs, particularly since the US attack on Iran in February.

Sakurai highlights government data showing a surge in crude oil import costs, up to 70-80 per cent, which will contribute to rising consumer prices. Strong demand for AI-related products and a weak yen also bolster economic growth, contributing to price pressures. With a weak yen and robust demand, manufacturers' profits are boosted, fueling demand-driven inflation.

The BOJ is well aware of these pressures, leading to a significant policy change. Consumer inflation may surpass 3 per cent by year-end, compelling the BOJ to intensify hikes to avert overshooting its 2 per cent target. The central bank is likely to revise up its inflation forecasts in October and raise rates again in December, potentially in October if the revision is significant.

After the expected rate hike to 1.5 per cent by year-end, further hikes to 1.75 per cent in the first quarter of 2027 and 2 per cent by June are anticipated. The BOJ's terminal rate is projected around 2 per cent, but it could be higher if inflation remains elevated. While the faster rate hikes may not strengthen the yen, continued fiscal expansion by Prime Minister Sanae Takaichi will likely keep the yen weak. Even with aggressive rate hikes, the yen's decline may only be modestly slowed.