Japan should gradually raise rates to around 1% – BoJ’s Tamura

The Bank of Japan (BoJ) should raise its short-term interest rates to around 1% as early as October 2025, a board member has said.

Speaking at a conference in Okayama today (September 12), Naoki Tamura said Japan’s neutral rate should be at around 1%. He believed the BoJ should raise rates to this level during the second half of its current forecast period, which covers the fiscal years 2024 to 2026.

The fiscal year in Japan ends in March and starts in April, meaning the BoJ’s forecast period ends in March 2027. This suggests Tamura’s calls for rate rises to 1% could materialise in October 2025 at the earliest. The BoJ’s policy rates currently sit at 0.25%.

Tamura said the rate rises would be “necessary” to prevent inflation overshooting and to achieve the price stability target in a “sustainable” and “stable” manner.

The BoJ’s inflation target is currently 2%. From the 1990s, the performance of the economy consistently resulted in the figure being below the bank’s target. In some years, this even resulted in deflation.

Since April 2022, however, inflation has been at or above 2%. This enabled the central bank to end the negative interest rate policy it introduced in 2016. It raised short-term interest rates to around 0.1% in March this year, and to their current level in July.

Despite calling for continued rate rises, Tamura emphasised that the process would need to be gradual. The BoJ, he said, needed to be mindful of market reactions to any increase in rates.

“In Japan, where a world with almost no interest rates has continued for a long time, it is necessary to carefully observe how economic entities will react to interest rates without making any assumptions,” Tamura said.

Policy-makers from the BoJ have been making similar remarks for the past few weeks, thereby reaffirming the bank’s hawkish stance following the stock market turmoil of early August.

Another board member, Junko Nakagawa, said yesterday (September 11) that the BoJ would continue to adjust its degree of monetary easing if the economic and price outlook met the bank’s forecasts.

His comments echoed remarks last week from governor Kazuo Ueda, who said the BoJ would continue to raise rates if the “outlook is realised”. The bank expects annual consumer price index inflation (exempting food) to be around 2.5% for 2024 and 2% for 2025 and 2026, according to its latest quarterly outlook report.