Former Bank of Japan Policy Board Member: If the yen depreciates again before the Japan-US summit, the earliest rate hike may be in March.

Former policy board member of the Bank of Japan, Makoto Sakurai, stated that if the yen starts to depreciate again before the scheduled Japan-US summit later this month, the Bank of Japan could raise interest rates as early as March. Prime Minister Sanae Takaichi is expected to visit Washington around March 18-19, before or after the next policy meeting of the Bank of Japan, to meet with US President Trump. Sakurai stated in an interview on Friday that Takaichi may seek help from the Bank of Japan to restrain the depreciation of the yen, as last month's rate check in Washington to support the yen indicated that the US prefers a stronger yen against the dollar. "Currency intervention only has a temporary effect in combating selling pressure on the yen. The best way to address a weak yen is through a rate hike by the Bank of Japan," Sakurai said. He maintains close contact with current policymakers. Sakurai mentioned that a further decline in the yen would raise inflation through higher import costs, partially offsetting the downward pressure from government fuel subsidies. He added that if there is a need to address a sharp decline in the yen, the Bank of Japan could consider highlighting the prospect of strong wage growth in annual spring wage negotiations between companies and labor unions as a reason for raising rates as early as March. "It would be more meaningful to wait until April, but depending on the yen's movement, the Bank of Japan may raise rates in March," Sakurai said. Sakurai served as a policy board member of the Bank of Japan from 2016 to 2021, during which the bank shifted its policy focus from large-scale asset purchases to controlling long-term rates by introducing yield curve control. He mentioned that the Bank of Japan may need to raise rates twice each in 2026 and 2027, in order to raise its policy rate (currently at 0.75%) to 1.75%, which is likely a neutral level that would neither cool down the economy nor overheat it. Sakurai stated that a too rapid rate hike could impact Japan's banking system by increasing the number of small business bankruptcies and harming the balance sheets of regional banks. The Bank of Japan ended its decade-long massive stimulus program in 2024 and has raised rates multiple times, including raising its short-term policy rate to 0.75% in December, reaching a 30-year high. As Japan has not achieved its 2% inflation target for nearly four years, Governor Kikuo Iwata has indicated that the Bank of Japan is prepared to continue raising rates if its economic forecasts come to fruition. Most economists surveyed expect the Bank of Japan to raise rates to 1% by the end of June, with the market pricing in a 70% possibility of a rate hike before April. The Bank of Japan's next policy meeting is scheduled for March 18-19. Its policy board will then meet on April 27-28, where they will also release new quarterly inflation forecasts. The weakened yen has become a political challenge for Japanese policymakers as it can harm households and retailers by raising costs of imported fuel and food. Since Sanae Takaichi, a fiscal and monetary policy dove, became prime minister in October last year, the yen has depreciated by around 8%, hitting an 18-month low at 159.45 in January. Although it has recovered some ground, the yen is currently hovering around 155 - significantly lower than the level of 147 before Takaichi took office.