The most hawkish official of the Bank of Japan hints at a possible interest rate hike in spring

According to Bloomberg, one of the most hawkish members of the Bank of Japan, Naoki Tamura, stated on Friday that if wage growth this year meets targets, the central bank could be in a position to raise interest rates as early as spring. This statement further boosted market expectations for a recent rate hike by the Bank of Japan.

Tamura spoke at a business conference in Yokohama, saying, "If it can be highly certain that wage growth will meet the target for the third consecutive year, then it can be determined as early as this spring that the 2% price stability target has been achieved. This is the first time a member of the Bank of Japan's policy committee has clearly pointed to the possibility of a rate hike in spring."

This remark implies that if Bank of Japan Governor Kazuo Ueda chooses to remain inactive at the upcoming policy meetings until April, he may face greater internal opposition. According to overnight swap trading, traders currently estimate the probability of a rate hike by the Bank of Japan before April to be about 75%, a significant increase from 40% a month ago.

Japan's key inflation indicator accelerated to 3.1% last year, exceeding the central bank's target for four consecutive years, marking the longest streak since 1992. Prime Minister Fumio Kishida won the election on Sunday, partly based on his commitment to alleviate cost-of-living pressures, which adds new considerations for the central bank's policy decisions.

Hawkish Member Clearly Defines Rate Hike Timeframe

In his speech, Tamura clearly defined the standard for price stability: "Economic entities, including households and businesses, should not have to consider fluctuations in the overall price level when making consumption and investment decisions." This definition aligns with the general understanding of central banks, as former Federal Reserve Chairman Alan Greenspan has expressed similar views multiple times.

However, Tamura also pointed out that many households are struggling with rising living costs, and many businesses are facing higher input prices, stating, "I personally believe we cannot claim that Japan is experiencing the defined price stability." This statement highlights his concerns about the current inflation situation and provides theoretical support for a rate hike.

As a former executive at Sumitomo Mitsui Financial Group, Tamura, along with another policy member Hajime Takata, is known for frequently voting against and calling for a faster normalization of policy. In the January meeting, Takata voted in favor of consecutive rate hikes, adding a hawkish tone to the decision to maintain interest rates.

Market Expectations Heat Up Rapidly

Even before Prime Minister Fumio Kishida's victory on Sunday, market expectations for his pro-stimulus policy stance had already sparked speculation that the yen would remain weak and exert upward pressure on inflation. Since the Bank of Japan's January policy meeting, observers from Barclays and BNP Paribas have adjusted their rate hike expectations to April.

Traders currently estimate the probability of a rate hike by the Bank of Japan before April to be about 75%, a significant jump from 40% a month ago. This sharp change in expectations reflects increased market confidence in a shift in the Bank of Japan's policy.

The Bank of Japan will announce its next policy decision on March 19, the same day Kishida plans to meet with President Trump in the United States. The overlap of these timelines adds additional complexity to the central bank's decision-making

Wage Growth Becomes a Key Consideration

Ensuring that the wage growth trend remains strong is a common concern for the Prime Minister and the Bank of Japan. The central bank views wage growth as a key part of generating a stable inflation cycle, which will drive higher consumption and economic growth. Japan's largest labor union federation typically announces the results of annual wage negotiations in mid-March, a key data point that has previously triggered central bank policy actions.

Tamura believes that the limited impact of raising interest rates to the current level of 0.75% on the economy indicates that the central bank is still a long way from the neutral interest rate level that neither restricts nor stimulates the economy. "There is still a considerable distance to the neutral interest rate level," Tamura stated, "In other words, even if the central bank raises policy rates, financial conditions will remain accommodative."

This statement suggests that even if the Bank of Japan raises rates in the spring, it will not pose substantial tightening pressure on the economy, leaving room for further policy normalization.

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