Former Bank of Japan board member sends signal: high probability of raising interest rates in April, steadily progressing towards normalization starting at 1.25%

According to a former member of the Bank of Japan's Policy Board, the Bank of Japan is very likely to decide to raise interest rates at its meeting in April this year. Seiji Adachi pointed out that compared to March, when the data is still insufficient, April will bring together various key indicators such as the final results of the "Spring Struggle" wage negotiations, business sentiment surveys, and the latest quarterly inflation outlook. These key data will provide decision-makers with concrete evidence to confirm that the goal of a "positive cycle of wages and prices" has been achieved, providing solid empirical support for further tightening of monetary policy. In Seiji Adachi's policy roadmap, he predicts that Japanese interest rates are likely to gradually rise to around 1.25%. He emphasized that 1.25% is not only an important milestone in this round of interest rate hikes, but also symbolizes the formal return of Japanese monetary policy to a "normalization" starting point - when Japan will completely bid farewell to the special policy environment of anti-deflation that has lasted for decades. Seiji Adachi's views align with the increasingly strong market expectations - that under Bank of Japan Governor Haruhiko Kuroda's leadership, monetary policy may take action in the spring, earlier than most economists predicted after the last rate hike in December last year. Regarding the political and macroeconomic environment, although current Japanese Prime Minister Sanae Takaichi is traditionally seen as a supporter of expansionary monetary policy, Seiji Adachi believes that the government is unlikely to intervene to prevent a rate hike. He stated that although some believe that after her overwhelming victory in last week's election, Prime Minister Takaichi may disrupt the Bank of Japan's policy normalization process, she is unlikely to stop a rate hike, as this may have the opposite effect. "Takaichi seems to be very sensitive to market dynamics," said Seiji Adachi. "If Takaichi tells the Bank of Japan not to raise rates, the potential market reaction could be a depreciation of the yen." During their first meeting after the election on Monday, the Japanese Prime Minister and Haruhiko Kuroda discussed economic issues and exchanged overall views, but did not make specific requests. At the time of Seiji Adachi's remarks, current members of the Bank of Japan's Policy Board have recently hinted that after raising the policy rate to 0.75% in December, the highest level in thirty years, there may be further rate hikes in the future. One of the most hawkish members, Naoki Tamura, hinted in a speech last week that there may be interest rate adjustments in the spring. For the Bank of Japan, a key factor is the progress of the annual wage negotiations currently underway. As agreements with large corporations will not be reached until March 23, the committee may consider it too early to take action at the next meeting ending on March 19, according to Seiji Adachi. By the time the Policy Board members meet on April 27 and 28, they will have seen the results of the wage negotiations as well as the latest quarterly surveys of business and household confidence released earlier that month. Seiji Adachi stated that this meeting also coincides with the Bank of Japan releasing its updated economic outlook report. Seiji Adachi served as a member of the Policy Board until March of last year. During his tenure, the Policy Board was busy weighing the risks of returning to deflation, so the idea of raising interest rates faced continuous internal opposition. He stated that since leaving, he has felt a shift in the Bank of Japan's stance on interest rate hikes. "It seems that the Bank of Japan has become slightly more positive about raising interest rates," said Seiji Adachi, noting that the emphasis on the lower limit of the estimated neutral interest rate range of 1% to 2.5% has decreased. "Now it is not just focused on the lower limit of the range. This may be related to its desire to reserve space for adjusting interest rates in case of a possible economic downturn in the future." Seiji Adachi cannot be certain how much the Bank of Japan may raise interest rates after raising rates to 1.25% in two more steps - this uncertainty arises from Japan's potential growth rate being constrained to around 0.5%. It is noteworthy that his forecast for the peak rate (slightly below 1.5%) is significantly lower than the median level estimated by economists in last month's survey (1.5%). On Monday, a government report showed that the Japanese economy grew by 0.2% on an annual basis in the final three months of last year, significantly lower than the market's widespread expectation of 1.6%. Seiji Adachi stated that given Japan's growth potential, this is not surprising. "Once interest rates reach around 1.25%, the Bank of Japan will eventually return to the starting point of normal monetary policy - that is, ending policies to address deflationary risks," said Seiji Adachi.