Bank of Japan likely to raise rates by July on mounting price pressure, ex-board member says

TOKYO — The Bank of Japan (BoJ) will likely raise interest rates by July, as soaring oil costs from the Middle East war increase the risk it will fall behind the curve in dealing with mounting inflationary pressure, its former board member Seiji Adachi said on Tuesday.

Underlying inflation has already hit the central bank’s 2% target, as seen in last week’s “tankan” survey that showed corporate five-year inflation expectations hitting 2.5%, said Mr. Adachi, who was a member of the BoJ board until March last year.

Surging oil prices and supply constraints brought about by the Iran war add to reasons for the central bank to soon raise its short-term policy rate from the current 0.75%, he said.

“With the Middle East conflict, the risk of the BoJ falling behind the curve in dealing with inflation has heightened somewhat,” Mr. Adachi told Reuters in an interview.

“It’s better for the BoJ to raise rates to levels deemed neutral to the economy as soon as possible,” he said, adding that Japan’s neutral rate likely stood somewhere around 1.25%.

But Mr. Adachi said the chance of a rate hike in April was “50-50,” as the Iran war kept markets volatile and muddled the outlook for Japan’s fragile economy.

“The BoJ will probably raise rates again in April, June or July,” judging from its recent hawkish communication and disclosure of data justifying further rate hikes, he said.

“But whether it hikes in April would be a tough call, as doing so would mean pulling the trigger when the economic impact of the war remains unclear.”

Politics could also complicate the BoJ’s decision, he said.

The fact dovish Prime Minister Sanae Takaichi appointed two reflationists to join the BoJ board is a sign the administration is opposed to further near-term rate hikes, Mr. Adachi said.

“Rate hikes would push up the cost of corporate borrowing. That runs counter to the administration’s push to boost investment in growth areas,” he said.

Markets have been rattled after the Iran war effectively shut the Strait of Hormuz, a chokepoint for about a fifth of global oil and gas flows, driving up crude oil prices and the safe-haven dollar against the yen.

The war has complicated the BoJ’s rate hike plan, though rising inflationary pressure and its hawkish communication have led markets to price in roughly a 70% chance of a hike in April.

Mr. Adachi said the BoJ will probably aim to raise rates twice this year, which will bring its policy rate to levels deemed neutral to the economy.

If the Middle East war turns into a protracted conflict that triggers a more than year-long oil shock, the BoJ may need to hike rates at a faster pace to push real borrowing costs out of negative territory, he said.

“We’re not there yet,” Mr. Adachi said. “But depending on how the conflict unfolds, the BoJ will face a very tough decision, sandwiched between rising inflation and low growth.” — Reuters