BY COMFORT OGBONNA
Japan’s central bank may raise interest rates twice before the end of the current fiscal year as policymakers shift their focus toward rising inflation risks, according to former Bank of Japan board member Makoto Sakurai. The remarks come after what he described as a significant turning point in the bank’s monetary policy stance, reflecting growing concern that inflation could remain persistently above target.
The Bank of Japan recently increased its short-term policy rate to a 31-year high of 1%, marking one of its most notable tightening moves in decades. The decision was framed as a preventive step aimed at avoiding the risk of underlying inflation exceeding the central bank’s 2% target over time. This marked a shift in tone compared with earlier rate increases, which were typically presented as evidence of progress toward sustainably achieving price stability rather than a response to overheating inflation.
Sakurai said the latest policy move signals a clear change in direction, with the central bank now more focused on controlling inflation risks rather than simply supporting a gradual return to its target. He added that the bank appears increasingly concerned that price pressures may become more entrenched if left unchecked.
He noted that recent increases in wholesale inflation are likely to filter through to consumer prices in the coming months. According to his outlook, developments in consumer inflation between July and September will play a key role in determining the timing of the next interest rate adjustment. If price growth continues to strengthen as expected, another rate hike before the end of the fiscal year is increasingly likely.
Sakurai suggested that a further increase in borrowing costs is effectively becoming the baseline expectation, with a move likely either in October or December depending on inflation data. He added that policymakers may choose to act more cautiously if inflation rises broadly in line with forecasts, preferring to wait until December to avoid destabilizing financial markets or triggering excessive volatility in asset prices.
However, he warned that if inflation accelerates more rapidly than expected, the central bank could be forced to move sooner and potentially implement additional tightening measures before the fiscal year ends in March. He emphasized that Japan’s economic conditions, including strong corporate earnings and a tight labor market, are increasingly supportive of higher inflation pressures rather than economic slowdown.
Sakurai projected that Japan’s policy interest rate could eventually rise to around 2% by early 2028, which would coincide with the end of Governor Kazuo Ueda’s current term. Such a trajectory would represent a significant normalization of monetary policy in a country that maintained ultra-low interest rates for many years to combat deflation.
Global developments, particularly ongoing tensions in the Middle East, have added further complexity to the Bank of Japan’s policy decisions. Rising energy prices linked to conflict in the region are feeding inflationary pressures in Japan, an economy heavily reliant on imported energy. At the same time, a persistently weak yen continues to increase import costs, further contributing to upward pressure on domestic prices.
Despite these challenges, Sakurai argued that interest rate increases alone may not be enough to reverse the yen’s weakness. He said currency depreciation is being driven more by structural concerns about Japan’s fiscal direction than by short-term monetary policy differences.
He pointed to concerns surrounding Prime Minister Sanae Takaichi’s expansionary fiscal approach as a key factor influencing investor sentiment. The administration’s reliance on large-scale spending programs and subsidies aimed at reducing fuel costs has added to market worries about Japan’s fiscal sustainability. A recent supplementary budget of about 3 trillion yen, financed through additional debt issuance, has further contributed to these concerns.
Sakurai warned that if the government proceeds with another supplementary budget this year, financial markets could begin to question Japan’s fiscal trajectory more seriously. He suggested that such developments could increase the risk of a credit rating downgrade and place additional downward pressure on the yen.
He also highlighted what he sees as a growing policy mismatch between the Bank of Japan and the government. While the central bank is moving toward tightening policy in response to inflation, fiscal policy remains expansionary, effectively adding further stimulus to an already inflationary environment. This lack of coordination, he argued, is a key reason why Japan continues to struggle with a weak currency.
According to Sakurai, unless monetary and fiscal policies become more aligned, Japan is unlikely to resolve its ongoing currency weakness in a sustainable way. He stressed that the combination of persistent inflation risks, heavy public spending, and structural economic pressures will continue to shape Japan’s financial outlook in the years ahead.
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