Ex-BOJ official warns rate hikes could push past 2%

Former Bank of Japan official Tsutomu Watanabe warned on Wednesday that the BOJ may raise its benchmark interest rate rapidly later this year, potentially pushing it above 2% — a level well beyond what most economists currently expect.coindesk+2

Watanabe, an economics professor at the University of Tokyo who left the central bank in 1999, made the comments to Bloomberg as Japan's currency continues to weaken despite successive rate increases. The yen has lost roughly 60% of its value since early 2021 and fallen an additional 3% this year, even as the BOJ has tightened policy.kucoin+1

A Rate Cycle Gaining Momentum

The warning comes less than a month after the BOJ raised its policy rate by 25 basis points to 1% at its June meeting — the highest level since 1995 and the first time borrowing costs have reached that mark in over three decades. The decision was approved in a 7-1 vote, with board member Toichiro Asada the sole dissenter.tradingeconomics+2

A Reuters poll conducted before the June meeting found the median economist expectation for Japan's terminal rate at 1.75%, with most forecasting the rate would reach 1.25% by year-end. Watanabe's projection of a rate above 2% would represent a pace of tightening far beyond that consensus.reuters

October Hike in Focus

Separately on Thursday, SMBC Nikko Securities economist Yoshimasa Maruyama said the BOJ appears on track for another rate increase as early as October, based on findings from the central bank's regional branch managers meeting. Maruyama noted that while the branch managers did not convey urgency for an immediate hike at the next meeting, their assessment of resilient production and potential for further price pass-through "can be seen as a step toward further rate increases."odaily+1

Mounting Market Pressure

The backdrop to these warnings is intensifying stress in Japan's bond market. Yields on the 10-year Japanese government bond climbed to 2.9% on Thursday, a level not seen since 1996, with analysts arguing the BOJ is "behind the curve" — raising rates too slowly relative to where markets have already moved. The government pushed back earlier this week against speculation that it is pressuring the central bank to keep rates low, insisting the BOJ retains full jurisdiction over monetary policy.japantimes+1

For global markets, a faster-than-expected BOJ tightening cycle raises the specter of another yen carry-trade unwind, in which investors who have borrowed cheaply in yen to fund positions elsewhere are forced to reverse those bets.spendnode+1