Bank of Japan’s Future Interest Rate Increases

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan (BOJ) is likely to continue raising interest rates in the coming years as inflation is expected to sustainably reach its 2% target, according to former governor Haruhiko Kuroda, who initiated a decade-long massive stimulus program.

Despite these anticipated rate hikes, Japan’s economy is projected to grow by over 1% this year and beyond, supported by rising real wages that bolster consumption, Kuroda noted in a research paper submitted to the House of Representatives’ annual journal on December 24.

Kuroda stated, “There seems to be no change to (the BOJ’s) basic stance of gradually raising interest rates, with an eye on economic and price developments.” He added, “That’s because a positive wage-inflation cycle continues, likely keeping inflation sustainably at the 2% target.”

However, Kuroda expressed uncertainty regarding the extent of future rate increases, citing challenges in estimating a neutral rate that would neither cool nor overheat Japan’s economy.

He suggested that higher borrowing costs might not significantly impact firms, as they possess ample cash reserves, while households could benefit from increases in interest paid on their substantial savings.

Kuroda warned that the government could face the most severe impact due to the rising costs associated with Japan’s considerable public debt, currently at 1,100 trillion yen ($6.96 trillion), which is three times the amount in 2000. He highlighted that if bond yields rise to the average level of 2.7% seen in the past, annual interest payments could reach 30 trillion yen, emphasizing the need for Japan to manage its fiscal situation.

The government’s budget for the next fiscal year includes a plan to allocate 10 trillion yen for interest payments.

Under Kuroda’s leadership, the BOJ launched a substantial asset-buying scheme in 2013, later incorporating negative interest rates and bond yield control to stimulate inflation towards the 2% target.

While proponents commend these measures for helping Japan emerge from economic stagnation, critics cite drawbacks, such as the negative effect on commercial banks’ profits due to prolonged low rates and market distortions from extensive asset purchases.

Kuroda defended the policies, arguing that the adverse impact on regional banks’ profits was limited and that the reduction in bond market function was a necessary trade-off for stimulating growth.

Current BOJ governor Kazuo Ueda has terminated Kuroda’s stimulus initiatives as of March and raised short-term interest rates to 0.25% in July, indicating a willingness for further hikes if Japan achieves sustained 2% inflation.

($1 = 158.0300 yen)