The day before yesterday, a central bank committee member: The Bank of Japan may raise interest rates before July

Japanese Bank of Japan board member Seiji Adachi said that, given that the Middle East war has caused oil prices to surge and heightened the risk that the Bank of Japan may lag behind the situation in dealing with intensifying inflation pressures, the central bank is likely to raise interest rates before July.

Adachi said in an interview with Reuters that core inflation has already reached the central bank’s 2% target, and that last week’s Tankan survey showed that companies’ 5-year inflation expectations have risen to 2.5%. The surge in oil prices and supply bottlenecks triggered by the Iran war further increase the case for the Bank of Japan to raise the short-term policy rate from its current 0.75 basis points as soon as possible.

He said that, as the Middle East conflict breaks out, the risk that the Bank of Japan will fall behind the situation in responding to inflation has worsened somewhat. The Bank of Japan’s best option is to raise rates to a level that is neutral for the economy as quickly as possible, and he added that Japan’s neutral interest rate could be around 1.25 basis points.

But Adachi said that, given that the Iran war has kept markets in turmoil and has made Japan’s fragile economic outlook more difficult to read, the likelihood of a rate hike in April is “50-50.” Judging from the Bank of Japan’s recent hawkish comments and data that support further rate hikes, the Bank of Japan is likely to raise rates again in April, June, or July. However, whether to hike in April will be a difficult decision, because that would mean taking action before the economic impact of the war is clear.

He also noted that political factors could further complicate the central bank’s decision-making. The appointment by Prime Minister Shinjiros Takachi, a dovish leader, of two inflation hawks to serve as deliberation members of the Bank of Japan indicates that the government is opposed to further rate hikes in the near term. Rate hikes will raise companies’ borrowing costs. This runs counter to the government’s policy of promoting investment in growth areas.

Adachi said the Bank of Japan may plan to raise rates twice this year, which would bring its policy rate to a level seen as neutral for the economy. If the Middle East war evolves into a long-lasting conflict, causing a sustained oil shock for more than a year, the Bank of Japan may need to accelerate its rate-hike pace to move actual borrowing costs out of negative territory.