Former Bank of Japan Executive Director: The next interest rate hike will follow or maintain the pace of quarterly austerity in December to curb the risk of inflation

The Zhitong Finance App learned that Eiji Maeda (Eiji Maeda), a former executive member in charge of the Bank of Japan's monetary policy affairs, said that the Bank of Japan may continue to raise interest rates every three months to curb the risk of inflation deviating from its stable price target. He said, “I expect the next rate hike by the Bank of Japan will be in December, followed by another rate hike in March or April next year.” “The pace of interest rate hikes has now been accelerated to about once every three months, and I think this pace is appropriate.”

Maeda Eiji's prediction is also broadly in line with market pricing. The overnight swap market shows that investors think the probability that the Bank of Japan will raise interest rates by December is about 80%. The market generally expects that the Bank of Japan will keep interest rates unchanged at the next policy meeting to be held on October 30. Meanwhile, according to a recent survey, most economists expect the Bank of Japan to raise the benchmark interest rate to 1.50% in December, continuing the faster pace of quarterly rate hikes in the current austerity cycle after the June and September rate hikes — at the beginning of this cycle, the Bank of Japan only raised interest rates once a year.

The Bank of Japan's two rate hikes in June and September were the fastest rate hikes by the central bank since 1990. This policy shift occurred against the backdrop of an acceleration in consumer prices in Japan and the weakening of the yen. The weak yen prompted Tokyo and Washington to jointly interfere in the foreign exchange market, and the US side also put pressure on Japan to tighten its monetary policy.

Maeda Eiji led the Bank of Japan's initial response to the COVID-19 pandemic. He did not completely rule out the possibility that the Bank of Japan will hold continuous meetings in the future to raise interest rates under specific circumstances, such as a sharp depreciation of the yen. However, he said that at present, this seems unlikely to happen. He said, “If the Bank of Japan continues to raise interest rates, the market may increasingly expect that the next meeting will continue to raise interest rates, and this poses a considerable risk. This is why the Bank of Japan has reason to avoid consecutive meetings to raise interest rates.”

A major focus of the Bank of Japan's 10-month policy meeting is whether the policy committee led by Bank of Japan Governor Kazuo Ueda will decide whether potential inflation has reached the 2% target level for the first time since setting this target in 2013.

In response, Maeda Eiji said, “I don't expect the Bank of Japan to clearly state that the price stability target of 2% has been achieved. But it wouldn't be surprising if the Bank of Japan made this judgment moderately early.”

The data released on Friday is expected to show that Japan's overall inflation rate rose to 2.1% in September, while the core inflation rate excluding fresh food and energy accelerated to 2.3%. Kazuo Ueda said last week that since potential inflation is already very close to the target level, the Bank of Japan can no longer tolerate potential inflation continuing to rise, which shows that he supports further interest rate hikes.

Japan is gradually emerging from long-term deflationary pressure. People familiar with the matter said that although it is finally possible to determine that the potential inflation rate is around 2%, the Bank of Japan's mission has not yet been completed because its goal is to stabilize inflation around this level.

However, Eiji Maeda said that if the Bank of Japan determines next week that the price trend is close to the target level and the financial environment remains relaxed, then this will send a signal to the market to raise interest rates in December.

After the interest rate hike in September, the Bank of Japan's policy interest rate rose to 1.25%, entering its estimated neutral interest rate range of 1.1% to 2.5% for the first time — a neutral interest rate that neither stimulates nor suppresses the economy. Maeda Eiji said that the Bank of Japan may eventually be forced to raise the benchmark interest rate to 2.25%, which basically means that it will still need to raise interest rates four times.

He said, “If the midpoint of about 1.75% is used as a benchmark, then the policy interest rate will reach a neutral level around the spring of next year. From that period on, making policy decisions and interpreting those decisions may become more difficult.”