Eiji Maeda, former executive director in charge of monetary policy at the Bank of Japan, recently stated that January next year is the most likely time for the Bank to raise interest rates again, expecting the rate hike to continue the previous trend of increasing by 0.25% every six months. Maeda believes that although the new Prime Minister, Shigeru Ishiba, has stated after taking office that the economy is not ready for a rate hike, this remark would not hinder the rate increase process, as Ishiba has inherited the economic policy direction of his predecessor, Fumio Kishida.
Maeda pointed out that before raising interest rates, the Bank of Japan will closely monitor three key factors: the outcome of the U.S. presidential election, the trend in service prices, and the progress of Japan's annual wage negotiations. The development in these three areas is expected to have a significant impact on the central bank's decision, with the earliest rate hike possibly in January next year, six months after the last increase in July, when the Bank will also release the latest economic forecast.
Although Shigeru Ishiba emphasized in a meeting with Haruhiko Kuroda, Governor of the Bank of Japan, that the economy is not ready for a rate hike, Ishiba later clarified in a statement that there are no major differences between his views and those of the Bank. In his inaugural speech, Ishiba emphasized that the government's primary task is to overcome deflation and push the economy onto a path of stable growth. His statement did not significantly alter market expectations for a rate hike.
Furthermore, Maeda also predicts that the Bank of Japan might increase borrowing costs to 1% by early 2026, with economic data showing a good recovery momentum in the Japanese economy. For instance, in August, basic wages grew by 2.9%, marking a historic high, while key inflation indicators have accelerated for the fourth consecutive month. These positive signs suggest that the Japanese economy is moving towards stable growth, providing more support for the central bank's plans to raise interest rates.
Maeda emphasized that it is unlikely the central bank will take action at the policy meeting on October 31st, as doing so would create a false expectation of "raising interest rates every three months." Governor Kuroda also reiterated that the Bank of Japan has ample time to respond to uncertainties in the economy and financial markets, and the next policy adjustment will be decided after a thorough evaluation.
Overall, despite ongoing financial market uncertainties, Maeda believes that Shigeru Ishiba's leadership will not change the Bank of Japan's process of raising interest rates, with January next year being the most probable window for a hike. During this time, the central bank will closely monitor global political and domestic economic developments to ensure the reasonableness of the timing for the rate increase.
