Observations from the outgoing governor: Haruhiko Kuroda claims that Japan has escaped deflation and that monetary and fiscal policies urgently need to change.

Former Governor of the Bank of Japan, Haruhiko Kuroda, stated that given the current "very healthy" state of the Japanese economy, Japan must continue with interest rate hikes and tighten fiscal policy. At the same time, he warned that the large-scale spending plan proposed by Prime Minister Sanae Takaichi could lead to accelerated inflation. Kuroda gave a specific prediction for Japan's future interest rate path, stating that with Japan's economy maintaining steady growth and wages continuing to rise, the Bank of Japan should aim to raise interest rates about twice a year in 2026 and 2027. He emphasized that this measure is aimed at gradually raising the benchmark interest rate to a "neutral level" that neither stimulates nor suppresses the economy. Kuroda believes that Japan has already emerged from decades of deflation and normalizing monetary policy is the necessary choice to support the exchange rate of the yen and prevent the economy from overheating. On Tuesday, Kuroda stated in an interview, "When Abenomics was implemented, Japan was suffering from deflation and a strong yen. Now, Japan is facing inflation and a weak yen. Japan needs to shift towards tighter fiscal and monetary policies." "The Bank of Japan must gradually raise interest rates to a neutral level for the economy. Fiscal policy must also tighten," Kuroda said, "I have doubts about increasing spending and cutting taxes." These remarks highlight the significant divergence in policy thinking between Kuroda, the most enthusiastic designer of Abenomics, and the current flagbearer Takaichi. Kuroda, who is known for introducing aggressive monetary stimulus policies in 2013 as part of former Prime Minister Shinzo Abe's "Abenomics" reflation policy, saw his term as Governor end in 2023, during which he used unconventional policy tools to drive economic growth and inflation for a decade. In recent years, due to inflation rates persistently exceeding the 2% target level, along with a tight labor market and rising wages, the Bank of Japan halted Kuroda's stimulus plans in 2024 and raised interest rates multiple times, including a rate hike in December last year. In contrast, fiscal policy may continue to be expansionary. As a supporter of Abenomics, Takaichi has increased spending and promised to suspend the 8% consumption tax on food for two years to alleviate the impact of rising living costs on families. Kuroda warned as a senior researcher at the National Graduate Institute for Policy Studies (GRIPS) that this expansionary fiscal policy may backfire, intensifying inflationary pressures and pushing up bond yields. "Supporting innovation to promote long-term potential growth is reasonable. But spending to alleviate the impact of rising living costs would backfire because it would fuel inflation," he said. Kuroda on the yen: The yen is indeed too weak, future interest rates may rise to 1.75% Takaichi's landslide victory in the February 8 election has raised market concerns about whether she will further advocate for loose fiscal and monetary policies. Last year, due to market concerns about the deteriorating fiscal situation in Japan, the yen and government bonds faced massive sell-offs, forcing her to temper her previous policy positions. On Tuesday, news emerged that Takaichi had informed Bank of Japan Governor Kaname Ueta that she remains cautious about further interest rate hikes. This move signals potential friction in monetary policy, which may complicate the Bank of Japan's interest rate hike plans. In response to this news, the yen to dollar exchange rate on Wednesday stood at 155.80. Although Japanese authorities have successfully prevented the yen exchange rate from falling below the psychologically significant level of 160 through verbal interventions, they have struggled to reverse the continuing weakness and depreciation of the yen. This downward trend in the yen has raised import costs and exacerbated overall inflationary pressure. Kuroda pointed out that based on Japan's recent economic growth, price trends, and the equilibrium exchange rate determined by economic competitiveness, the recent performance of the yen may be "somewhat too weak." He mentioned that while currency intervention measures can have a short-term impact on the yen's direction, they cannot ensure that this impact is sustainable. It is worth noting that from 1999 to 2003, Kuroda served as Japan's highest-ranking currency diplomat, specializing in the formulation and execution of Japan's exchange rate policies. Kuroda also stated that if the Japanese economy can maintain its current growth momentum, the Bank of Japan may raise the current key policy rate of 0.5% to around 1.5% - 1.75% in the coming years. While the Bank of Japan under Kuroda's leadership has struggled to achieve its inflation target, his decade-long massive stimulus measures successfully reversed the prolonged appreciation of the yen. It should be noted that the previous yen appreciation had been detrimental to Japanese exporters. One distinctive feature of Kuroda's monetary experiment is the bold and simple communication strategy to persuade the public to believe that after decades of deflation, prices will eventually rise. However, he stated that in the current phase of the Bank of Japan's gradual exit from stimulus and policy normalization, this shock therapy communication style is no longer appropriate. "When the central bank gradually raises interest rates to a neutral level, little is needed to be said," he stated, believing that Governor Ueta's subtle and ambiguous policy communication approach is correct. "Keeping a low profile is wiser, Governor Ueta's communication style is appropriate."