(Bloomberg) -- Bank of Japan Board Member Naoki Tamura indicated that the central bank needs to raise its benchmark rate more aggressively than many economists have been expecting, noting that the neutral policy rate in Japan is 1% or higher.
“I believe that we need to raise the short-term rate to at least around 1% in the second half of the bank’s projection period through fiscal 2026,” Tamura said Thursday in a speech to local business leaders in Okayama, western Japan. “That’s needed to contain upside price risks and for achieving the stable and sustainable inflation target.”
The yen advanced against the dollar after his remarks before paring gains.
Tamura, the most hawkish member on the bank’s nine-member board, issued clear signals about the need to raise rates from the current 0.25% at a gradual pace a day after fellow board member Junko Nakagawa sent the yen to its highest level this year by reaffirming the BOJ’s standing policy stance. While clearly indicating his support for rate hikes down the road, Tamura’s speech also indicated little need to make a policy move when the board gathers next week.
“We need to closely watch how the economy responds to shifts in interest rates without preconceptions,” said Tamura, a former senior executive of Sumitomo Mitsui Financial Group.
Speaking to reporters in the afternoon, Tamura chose to keep his options open by saying there may or may not be another interest rate hike in 2024.
“I don’t have any preconception about the pace of rate hikes, as it depends on the economy, inflation and financial conditions,” Tamura said. “But unlike in the US and Europe, it’s likely to be a gradual one.”
Tamura noted it’s probably better for policymakers to have an estimated level for the neutral rate in mind, as doing so helps them move on policy in a timely manner.
Tamura said he views Japan’s nominal neutral rate, the level where policy is neither restrictive nor stimulative, at around 1% at least. The BOJ’s latest outlook reflects its expectations that inflation will be around its target level from October next year through March 2027, the end of the projection period.
Governor Kazuo Ueda and other board members have refrained from offering precise figures for the neutral rate, as estimates tend to vary.
Tamura indicated market pricing for the BOJ’s policy path may be too slow at this point, noting there’s a risk the BOJ might eventually have to conduct rapid rate hikes if the central bank hones to the expected path.
Some economists consider Tamura’s messages a leading indicator for the BOJ’s policy thinking, given his past record.
In August of 2023 Tamura indicated that the central bank might achieve its 2% inflation goal by early 2024, in remarks that boosted speculation over the impending end of the bank’s negative interest rate. Authorities wound up ending the world’s last negative rate in March, earlier than many economists expected.
Tamura also cited the need for a broad policy review in December 2022, well before Ueda announced in April 2023 that the bank would conduct one.
(Updates with comments from afternoon press conference)
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