In a notable shift, Naoki Tamura, a hawkish policy maker at the Bank of Japan (BOJ), has publicly advocated for a significant increase in interest rates, suggesting that they should reach at least 1% by late 2025. This is the first time a BOJ board member has specified a target level for interest rates as part of the bank’s ongoing monetary tightening efforts, as reported by Reuters. 

Tamura’s call reflects growing confidence in Japan’s economic recovery, which he believes will support the BOJ’s inflation target of 2%. In a speech delivered to business leaders in Okayama, Tamura emphasised the necessity of raising the short-term policy rate to around 1% to achieve and maintain this inflation goal sustainably. He highlighted that this rate represents the neutral level, which neither stimulates nor restrains the economy.

This pronouncement aligns with recent trends within the BOJ, where several board members have advocated for continued tightening despite financial market volatility. The central bank is poised to keep rates steady at its next meeting on September 20, but there is strong speculation—backed by over half of economists surveyed by Reuters—that further rate hikes will occur before the year ends.

Tamura’s remarks come in the wake of the BOJ’s landmark decision earlier this year to abandon negative interest rates. The bank raised short-term rates to 0.25% in July, citing progress towards its inflation target. Governor Kazuo Ueda has indicated that the BOJ remains prepared to increase rates further if inflation remains around 2%, provided it is accompanied by robust wage growth.

Despite his firm stance on rate hikes, Tamura acknowledged the need for a careful evaluation of how rising borrowing costs might impact Japan’s economy, given its prolonged period of near-zero interest rates. He warned that market expectations might be underestimating the necessary pace of rate increases to prevent inflation from overshooting.

Tamura also expressed concerns about rising inflation risks, driven by tightening labour markets and increasing wage pressures, which could lead to higher consumer prices. Core consumer inflation hit 2.7% in July and has been above the 2% target for 28 consecutive months, underscoring the urgency of addressing inflationary pressures.

The neutral interest rate, which central banks use to gauge monetary policy effectiveness, remains an estimated value rather than a directly observable figure, adding complexity to the BOJ’s policy decisions.