BOJ's Most Hawkish Board Member Calls for Rate Hike to 1% by 2026, Yen Strengthens

Bank of Japan (BOJ) Board Member Naoki Tamura has signaled a significant shift in the central bank’s monetary policy, suggesting that Japan’s benchmark interest rate needs to be raised to at least 1% by the second half of fiscal 2026. His comments, made in a speech to local business leaders in Okayama, mark a notable divergence from the BOJ’s current stance and reflect growing concerns about managing inflationary pressures.

Tamura, widely regarded as the most hawkish member of the BOJ’s nine-member board, emphasized the necessity of increasing the short-term rate from its current level of 0.25%. His remarks are aimed at addressing what he views as upside price risks and achieving a stable and sustainable inflation target. The yen appreciated against the dollar following Tamura’s speech but later pared its gains.

In contrast to his more aggressive stance, fellow board member Junko Nakagawa had recently reaffirmed the BOJ’s existing policy framework, leading to a stronger yen. Despite his clear endorsement of future rate hikes, Tamura suggested that no immediate policy changes are necessary for the upcoming BOJ meeting next week.

“We need to closely watch how the economy responds to shifts in interest rates without preconceptions,” Tamura stated, adding that any potential rate hikes would be gradual and dependent on economic, inflationary, and financial conditions.

Tamura, a former senior executive at Sumitomo Mitsui Financial Group, noted that Japan’s nominal neutral rate—the rate at which monetary policy neither stimulates nor restricts economic activity—should be considered around 1%. This level is seen as crucial for the BOJ to move forward with its policy adjustments in a timely manner.

While Tamura’s forecasts indicate that Japan might hit its 2% inflation target sooner than previously expected, his call for higher rates has prompted speculation about the BOJ’s future policy direction. His past pronouncements, including his early call for a policy review that preceded the BOJ’s March 2023 decision to end its negative interest rate, have often been seen as indicators of the central bank’s evolving strategy.

Economists are now debating whether Tamura’s views suggest a potential for more rapid rate increases if inflationary pressures continue to build. The BOJ’s latest outlook anticipates that inflation will meet its target from October 2024 through March 2027, the end of its current projection period.

Governor Kazuo Ueda and other board members have been more cautious, avoiding specific estimates for the neutral rate, which can vary widely. Tamura’s latest remarks highlight the ongoing debate within the BOJ on how best to navigate Japan’s economic recovery and inflationary challenges.