Takeo Hoshi, a monetary policy expert and economics professor at the University of Tokyo, emphasized that the Bank of Japan should gradually raise interest rates to prevent inflation from significantly exceeding its 2% target.
He noted that Japan is experiencing unprecedented wage growth due to a severe labor shortage, which is driving up labor costs and compelling companies to increase prices.
After concluding a series of unconventional easing measures in March, the Bank of Japan will persist in raising rates to stabilize inflation expectations around 2% and eventually start quantitative tightening, Hoshi mentioned in an interview with Reuters on Friday.
Hoshi, who maintains close ties with current BOJ policymakers, indicated that if the BOJ does not raise rates, inflation in Japan could accelerate excessively, potentially mirroring the levels seen in the U.S. and Europe.
He underscored the substantial risk of inflation surpassing the central bank's target, emphasizing that this should be a major concern for the Bank of Japan. While Hoshi did not specify the exact timing for raising rates from their current near-zero level, he stressed that the increase should occur "gradually" due to the risks associated with rising inflation.
"In deciding when to shift policy, the BOJ must also take into account how its U.S. and European counterparts move as that could affect asset prices including exchange rates," he shared.
Hoshi participated in a Bank of Japan seminar on May 21 that examined the advantages and disadvantages of past unconventional monetary policy. In March, the Bank of Japan concluded its eight-year policy of negative rates and capping long-term borrowing costs at zero, marking a historic shift from extensive stimulus measures.
Bank of Japan Governor Kazuo Ueda stated that the central bank plans to raise rates to a neutral level for the economy, assuming that growth and inflation align with projections. Many market participants anticipate rate increases this year, with some speculating that this could occur as early as July.
Expectations for a rate hike pushed Japan's 10-year government bond yield up to 1.10% on Thursday, its highest level since July 2011. By Friday, the benchmark yield was at 1.065%.
Hoshi described the recent rise in bond yields as a "good sign," indicating that the Bank of Japan's decision to end yield controls has enabled the market to adjust yields on its own.
However, he warned against sharply reducing bond buying and selling, noting that the bank's substantial asset base could amplify its impact on the market.
Hoshi suggested that the BOJ could outline a plan for gradually unloading its substantial bond holdings over a period of, for example, 20 years. He emphasized that the BOJ should make it clear to the markets that this plan is flexible and could be adjusted based on changing circumstances.
Core inflation in Japan hit 2.2% in April, remaining above the central bank's target for over two years as companies pass rising raw material costs onto households.
The Bank of Japan has emphasized the necessity of maintaining low interest rates until inflation is sustainably driven by rising wages and domestic demand. Ueda also pointed out that inflation expectations are around 1.5%, which is below the target level of 2%.
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