The Bank of Japan is expected to continue raising interest rates in the coming years as inflation shows signs of sustainably reaching the central bank’s 2% target, according to former Governor Haruhiko Kuroda.

Known for his decade-long stimulus programme, Kuroda highlighted the likelihood of rate hikes while forecasting Japan’s economy to grow by more than 1% this year and beyond, supported by rising real wages that are driving consumption.

In a research paper submitted to the nation’s House of Representatives annual journal, Kuroda pointed to the BOJ’s gradual approach to tightening monetary policy, emphasising the ongoing positive cycle between wages and inflation. However, he also acknowledged the uncertainty in determining how far rates could rise without hindering economic growth or overheating the economy, according to a Reuters report.

Kuroda suggested that higher borrowing costs are unlikely to significantly burden firms, many of which are cash-rich, while households stand to benefit from increased interest on their substantial savings. However, he warned that the government could face considerable strain due to the rising cost of servicing Japan’s massive public debt.

Japan’s government bonds, currently valued at JPY1,100 trillion ($6.96 trillion), have tripled since 2000. If bond yields return to the average level of 2.7% seen that year, annual interest payments could soar to JPY30 trillion. Kuroda stressed the urgent need for fiscal reform to manage the nation’s growing debt burden. For the next fiscal year, the government has allocated JPY10 trillion for interest payments alone.

During his tenure, Kuroda spearheaded a sweeping asset-buying programme in 2013, combining negative interest rates and bond yield control to combat deflation and achieve the 2% inflation target. While these policies were credited with ending Japan’s prolonged economic stagnation, critics pointed to adverse effects, such as reduced profitability for commercial banks and market distortions caused by large-scale asset purchases.

Defending his policies, Kuroda argued that the impact on regional banks was minimal and that the bond market challenges were an acceptable cost for revitalising growth.

Since Kuroda’s departure, current BOJ Governor Kazuo Ueda has shifted course, ending the stimulus measures in March and raising short-term interest rates to 0.25% in July. Ueda has indicated further hikes could be on the horizon if Japan maintains progress toward achieving sustainable 2% inflation.