The Bank of Japan (BOJ) is expected to raise interest rates twice more by the end of the current fiscal year ending next March. Former BOJ board member Makoto Sakurai revealed the prediction following the central bank's drastic decision to completely shift its monetary focus to combat the risk of a spike in inflation.
The move follows the BOJ's surprise move on Tuesday, which raised its short-term policy rate to a 31-year high of 1.0%. In contrast to previous forecasts, the central bank is now in an emergency phase to prevent core inflation from accelerating beyond its projected long-term target of 2.0%.
Sakurai assessed the rate hike decision between October or December, depending on the forecast for consumer inflation data for the July-September quarter. If corporate profits remain healthy and the labor market remains tight, the BOJ is expected to gradually raise interest rates to 2.0% by early 2028.
Despite the central bank's hawkish outlook, the yen has remained steady at around 161.18 against the US dollar. According to him, the yen's decline is no longer due to the interest rate gap alone, but rather to investor concerns about the aggressive budget policy led by Prime Minister Sanae Takaichi.
Takaichi's administration has reportedly approved a 3 trillion yen ($18.6 billion) supplementary budget financed by the issuance of new debt bonds to finance fuel subsidies. Sakurai warned that the mismatch between the BOJ's tightening measures and the government's expansionary fiscal policy will continue to weigh on the yen and risk a downgrade of the country's credit rating.
