A former executive director of the Bank of Japan who previously oversaw monetary policy said the central bank might raise interest rates every three months to manage the risk of inflation deviating from its price stability target.
“I expect the next rate hike in December, followed by another in March or April,” said Eiji Maeda in an interview on Tuesday. “The current pace of tightening has accelerated to about every three months, and I think that’s appropriate.”
This outlook aligns closely with market pricing. Overnight swap markets indicate investors see roughly an 80% chance of a rate hike in December. The market widely expects the BOJ to hold rates steady at its next policy meeting on October 30.
“If the BOJ raises rates twice in a row, markets could increasingly anticipate further hikes, which would pose significant risks,” Maeda said. “That gives the BOJ reason to avoid consecutive rate increases.”
A key focus at the October meeting will be whether the BOJ considers core inflation—excluding fresh food and energy—to have reached its 2% target for the first time since the goal was set in 2013.
“I don’t think the BOJ will formally declare that the 2% price stability target has been achieved,” Maeda said. “But I wouldn’t be surprised if it slightly anticipates this milestone.”
Data expected to be released Friday shows overall inflation rose to 2.1% in September, while core inflation excluding fresh food and energy accelerated to 2.3%.
Last week, Ueda stated that as underlying inflation is now very close to the target, the central bank can no longer tolerate further inflationary pressures, signaling his support for additional rate hikes.
Japan is gradually emerging from years of deflationary pressure. According to sources familiar with the matter, although Japan’s underlying inflation has finally reached around 2%, the central bank’s mission remains incomplete, as its goal is to stabilize inflation near this level.
Maeda noted that even so, if the BOJ sees price trends hovering around its target and financial conditions remain loose next week, that would signal a December rate hike. He currently serves as president of Chiba Institute of Economics.
The September rate hike raised the BOJ’s policy rate to 1.25%, pushing it into the neutral range of 1.1% to 2.5% it had projected. A neutral rate is one that neither stimulates nor restrains economic activity. Maeda said the BOJ might ultimately be forced to raise the benchmark rate to 2.25%, implying four more hikes are needed.
“If we take around 1.75% as the midpoint, the policy rate would reach a neutral level by spring next year,” Maeda said, also serving as chief economist at the BOJ. From then on, “policy decisions and their explanations could become increasingly difficult.”
