By Megumi Fujikawa

TOKYO--If the Bank of Japan wants to raise interest rates further, it will likely need to do so this year before the window of opportunity closes, says Sayuri Shirai, a former board member at the central bank.

Weak Japanese demand makes it hard to justify higher borrowing costs, and if inflation drops below the Bank of Japan's 2% target it will be even tougher to back the case for another hike, she said at an event held by The Wall Street Journal in Tokyo on Wednesday.

The outcome of Japan's trade talks with the U.S. will be a major factor in the BOJ's next decision, said Shirai, who was on the central bank's policy board between 2011 and 2016 when it implemented large-scale monetary easing. She is currently an economics professor at Keio University.

"The BOJ probably wants to normalize policy when they can and correct the excessive depreciation of the yen even a little," she said. "However, the Japanese economy is simply too weak, and fragile domestic demand doesn't align with rising interest rates."

Wage growth in Japan has been encouraging, but households remain hesitant to spend amid persistent inflation. Private consumption was flat during the January-March period, according to recent government data.

The central bank has said it expects consumer inflation to slow below its 2% target in the next fiscal year starting in April 2026, as well as the year after. This, Shirai said, would complicate any decisions to hike rates further.

Headwinds to growth are also getting stronger. Japan's economy is at risk of a technical recession after contracting in the first quarter, and exports to the U.S. dropped for the first time in four months in April, highlighting the impact of higher tariffs.

Until President Trump's sweeping trade policy changes sparked concerns about a global economic slowdown, many BOJ watchers had expected the central bank to tighten policy in a six-month cycle. Uncertainty around tariffs and negotiations has split views on the path ahead for the BOJ, which has held steady since January, when it raised its policy rate to 0.5%.

Between domestic weakness at home and unpredictable risks abroad, the BOJ is in a tough spot.

"If the BOJ really wants to raise interest rates, I think they should push hard this year. However, given how weak domestic demand is, it's going to be very difficult," Shirai said.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

(END) Dow Jones Newswires

May 21, 2025 04:50 ET (08:50 GMT)

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