Sakurai, speaking to Reuters on Monday, said the first rate hike to 1.0% could occur around June or July next year, contingent on U.S. economic performance as well as domestic wage and price trends. Subsequent increases may prove more challenging, as they would push borrowing costs closer to levels considered neutral for the Japanese economy and could draw criticism from proponents of looser monetary policy aligned with Prime Minister Sanae Takaichi.
“The BOJ likely views 1.75% as its estimated neutral rate. A hike to 1.5% would remain below that threshold, leaving room to cut rates if conditions weaken,” Sakurai said. He added that the central bank may increase rates twice in the fiscal year starting April 2026 if inflation remains above the 2% target and the U.S. economy continues to support growth. Conversely, uncertainty in global or domestic markets could delay further hikes until 2027.
Sakurai suggested the BOJ prefers a pace of roughly one hike every six months but remains cautious about potential pushback from the administration, which may explain Ueda’s measured communication.
The BOJ’s recent move to lift its policy rate to 0.75% from 0.5% marks the first time borrowing costs have reached such levels in three decades, signaling a gradual shift away from years of ultra-loose monetary policy. While Ueda acknowledged that rates are still below the estimated neutral range, he provided no specific timeline for future increases.
Market Response and Policy Risks
Markets reacted to the BOJ’s cautious approach by selling off the yen, prompting government officials to warn of potential intervention amid concerns over currency-driven inflation. Sakurai said the central bank likely secured approval from Takaichi and Finance Minister Satsuki Katayama to continue normalizing policy, but noted that further rate increases could become politically sensitive.
Japan has seen inflation surpass the BOJ’s 2% target for nearly four years, driven by rising raw material costs and labor shortages prompting higher wages. The BOJ’s “tankan” survey indicates businesses expect inflation to average 2.4% over the next five years, signaling that price growth is taking root in the economy.
Sakurai also cautioned that the government’s planned spending package to offset household cost pressures could unintentionally accelerate inflation. Expansionary fiscal measures, he said, risk undermining market confidence in Japan’s finances, potentially raising bond yields and weakening the yen further.
Since taking office, Ueda has guided the BOJ out of a decade-long period of extreme stimulus, implementing three rate hikes, including the recent move to 0.75%. His five-year term runs through April 2028, during which the central bank is expected to balance the twin goals of sustaining growth while keeping inflation in check.