The yen rises to an eight-week high, and a senior official from the Bank of Japan states: interest rates must be raised to 1% in the second half of the fiscal year!

On Thursday, Naoki Tamura, a hawkish member of the Bank of Japan, called for a faster pace of interest rate hikes, pushing the yen to its highest level against the dollar in eight weeks.

According to The Wall Street Journal, Tamura stated during a speech to business leaders in Nagano Prefecture, Japan:

“In order to reduce the upside risks to prices and achieve the price stability target in a sustainable and stable manner, it is necessary for the Bank of Japan to raise interest rates to around 1% at least in the second half of fiscal 2025.”

He added that this level may align with a neutral interest rate that neither restricts nor stimulates the economy. Analysts believe this statement suggests that the Bank of Japan may tighten monetary policy faster than some economists and investors expect. The market currently generally anticipates one to two more rate hikes next fiscal year, each by 25 basis points, but Tamura's remarks indicate that the policy rate could exceed 1%.

After the speech, the yen briefly rose to around 151.80 against the dollar, marking the highest level since December 11. It is currently reported at 152.48.

Many economists expect the Bank of Japan to raise interest rates again later this year, but some warn that as rates approach levels not seen in Japan for 30 years, the next steps need to be considered more cautiously.

Notably, as a hawkish committee member, Tamura proposed a rate hike last December, citing increased risks of rising consumer prices. Although the proposal was voted down, the policy committee subsequently decided to raise the rate from 0.25% to 0.5% at the January meeting.

Economist Yusuke Matsuo believes Tamura's remarks may be testing the market's reaction to the idea of “raising rates at least once every six months.” The Bank of Japan has been working to improve communication with the market to minimize the disruption of its policy measures.

However, Matsuo also expects inflation to slow, and the Bank of Japan may have to stop raising rates when they reach 0.75%.

In contrast, Tamura stated that when the wage trends of small businesses become clearer, the Bank of Japan should be able to achieve the goal of creating a sustainable and stable 2% inflation in the second half of fiscal 2025. He believes:

“The Bank of Japan must raise rates in a phased and timely manner while carefully assessing what the appropriate short-term interest rate level for the economy should be.”

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