Global Market: BOJ could raise rates to 2% by June 2027 as inflation risks mount: Sakurai
The comments come after the central bank raised its benchmark interest rate to 1.25% in September, its highest level in 31 years. The move marked a further shift away from its long-standing ultra-loose monetary policy as inflation risks broaden.
Sakurai said the BOJ was increasingly focused on preventing price pressures from becoming entrenched, with higher fuel costs, a weak yen and strong demand linked to artificial intelligence adding to inflation risks, Reuters reported.
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Fuel costs add to inflation pressuresJapanese consumer prices could rise more than 3% by the end of this year and into early 2027 as higher energy costs feed through to households, Sakurai said, according to Reuters.
Government data showed that Japan’s crude oil import costs had risen by around 70%-80% in recent months from levels before the US attack against Iran in February, he said. Higher energy costs are expected to put further upward pressure on consumer inflation.
A weaker yen has also raised import costs, while strong AI-related demand has boosted manufacturers’ profits and supported the economy. These factors could contribute to broader demand-driven price pressures, Reuters reported.
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Inflation forecast upgrade in focus
Sakurai expects the BOJ to raise its inflation forecasts in its quarterly outlook report due in October. He sees another rate increase as most likely in December, although a larger-than-expected upward revision to the inflation outlook could prompt the central bank to act as early as October, Reuters reported.
Under his projected path, the BOJ could raise rates to 1.5% by the end of this year, followed by an increase to 1.75% in the first quarter of 2027 and 2% by June.
The 2% level could represent the BOJ’s terminal rate under current conditions, although Sakurai said rates could eventually move higher if inflation remains around 3%, according to Reuters.
Yen remains under pressure
The BOJ raised its policy rate to 1.25% last week, with Governor Kazuo Ueda signalling that the central bank had entered a new phase focused on preventing inflation from overshooting its 2% target, Reuters reported.
The yen nevertheless weakened after the decision as investors focused on two dissenting policymakers and questioned how quickly the BOJ would tighten policy.
Sakurai said the two dissenters were unlikely to prevent further rate increases, but a faster pace of hikes may not provide significant support to the yen, according to Reuters.
Investors could continue selling the yen and Japanese government bonds if Prime Minister Sanae Takaichi pursues expansionary fiscal policy, Sakurai said.
Even aggressive BOJ rate hikes may only slow the yen’s decline unless there is a change in the government’s fiscal policy stance, Reuters reported.
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