Former Bank of Japan Executive Director: The next rate hike will be in December, and a quarterly tightening pace may be maintained thereafter to curb inflation risks

According to Golden Ten Data, former Bank of Japan executive board member Eiji Maeda, who was previously responsible for the central bank’s monetary policy affairs, stated that the Bank of Japan may continue to raise interest rates every three months in order to curb inflation deviating from its stable price target. He said: “I expect the Bank of Japan’s next rate hike to be in December, with a possible further increase in March or April next year.” “Currently, the pace of rate hikes has accelerated to about once every three months, and I think this pace is appropriate.”

Eiji Maeda’s forecast also broadly matches market pricing. Overnight swap markets show investors believe there is about an 80% probability the Bank of Japan will raise rates again by December. The market generally expects the central bank to keep rates on hold at its next policy meeting on October 30. Meanwhile, a latest survey shows most economists predict the Bank of Japan will lift its benchmark rate to 1.50% in December, continuing the faster quarterly rate hikes seen in this tightening cycle after increases in June and September — whereas at the beginning of this cycle, the Bank of Japan raised rates just once per year.

The two rate hikes in June and September this year marked the fastest pace of tightening by the Bank of Japan since 1990. This policy shift comes amid accelerated consumer price increases in Japan and a weakening yen. The yen’s weakness previously prompted a joint intervention in currency markets by Tokyo and Washington, and the US also put pressure on Japan to tighten monetary policy.

Eiji Maeda once led the Bank of Japan’s initial response to the COVID-19 pandemic. He has not completely ruled out the possibility of the Bank of Japan raising rates at successive meetings in special circumstances, such as a sharp depreciation of the yen. However, he said this currently appears unlikely. He stated: “If the Bank of Japan raises rates consecutively, markets may increasingly expect more hikes at subsequent meetings, which could bring considerable risk. That’s one reason the Bank of Japan has grounds to avoid hiking at successive meetings.”

A major focus of the Bank of Japan’s October policy meeting is whether the policy committee led by Governor Kazuo Ueda will determine that underlying inflation has reached the 2% target level for the first time since the objective was set in 2013.

On this point, Eiji Maeda said: “I expect the Bank of Japan will not explicitly state that the 2% price stability target has been achieved. But it would not be surprising if the central bank moves that assessment moderately forward.”

Data due out Friday is expected to show that Japan’s overall inflation rate in September rose to 2.1%, while the core inflation rate excluding fresh food and energy accelerated to 2.3%. Last week, Kazuo Ueda said that with underlying inflation now very close to the target, the Bank of Japan can no longer tolerate further increases, indicating his support for additional rate hikes.

Japan is gradually emerging from long-term deflationary pressures. According to informed sources, although it can finally be judged that underlying inflation is now around 2%, the Bank of Japan’s task is not yet complete, as the aim is to stabilize inflation near this level.

However, Eiji Maeda said that if the Bank of Japan judges next week that price trends are already close to target levels while financial conditions remain accommodative, it would signal to the market a likely rate hike in December.

After September’s rate increase, the Bank of Japan’s policy rate climbed to 1.25%, entering for the first time its estimated neutral rate range of 1.1% to 2.5% — with the neutral rate defined as the level that neither stimulates nor restrains economic growth. Eiji Maeda said the Bank of Japan might ultimately be forced to lift the benchmark rate to 2.25%, which would basically mean a need for four more rate hikes.

He stated: “If you take a midpoint of around 1.75% as a baseline, then the policy rate will reach a neutral level around the spring of next year. From that period on, policy decisions and the explanations for those decisions may become increasingly difficult.”