A key figure on the Bank of Japan's policy board, known for his hawkish stance, has indicated that conditions for an interest rate increase could materialize as early as this spring. Naoki Tamura, a board member, stated on February 13 that the Japanese economy is in the final stage of confirming the achievement of its 2% price stability target. He suggested that if strong wage growth for a third consecutive year becomes highly certain this spring, the central bank would be very likely to formally declare its inflation goal as met.

Japan's core inflation rate accelerated to 3.1% last year, marking the fourth consecutive year it has exceeded the central bank's target—the longest such streak since 1992. Tamura expressed strong confidence in a fundamental shift in the nature of Japan's inflation. He noted that the inflation momentum has transitioned from being driven by volatile raw material costs to a more "endogenous" and "sticky" type supported by rising labor costs. Tamura emphasized that a positive cycle between prices and wages is forming as companies change their pricing behavior, providing a solid foundation for the Bank of Japan to move away from its long-standing ultra-loose monetary policy.

Ensuring robust wage growth is a shared priority for the Prime Minister and the central bank, which views it as crucial for establishing a stable inflation cycle that supports consumption and economic growth. The results of annual wage negotiations, typically announced by Japan's largest trade union confederation in mid-March, are a key data point closely watched by the central bank.

Tamura defined price stability as a state where households and businesses can make consumption and investment decisions without worrying about fluctuations in the general price level. However, he personally believes Japan cannot yet claim to be experiencing such stability, as many families struggle with rising living costs and companies face challenges from higher input costs.

Even before the Prime Minister's decisive election victory, market expectations of her win had fueled speculation about continued yen weakness and persistent inflation. Her historic victory was partly attributed to campaign promises to ease the pain of rising living costs.

Tamura Warns: Delayed Action Could Force Aggressive Hikes; Current Rates Remain Highly Accommodative

Regarding the future path of interest rates, Tamura assessed that the current monetary environment remains extremely accommodative, even after recent adjustments. He stated that, despite the policy rate being raised to 0.75% in December, Japan's "neutral rate"—which neither stimulates nor restrains the economy—is likely at least 1%, indicating significant room for further rate increases. He urged the policy board to adjust flexibly based on economic data to avoid being forced into more aggressive hikes later due to delayed action, ensuring a smooth macroeconomic transition. Tamura noted that there is still considerable distance to the neutral rate level, meaning financial conditions would remain accommodative even after a rate hike.

Tamura's comments are likely to intensify market speculation that the next rate hike could occur in April, or possibly as early as next month. Overnight swap trading indicates traders now see about a 75% chance of a rate hike by April, a significant jump from around 40% a month ago. Since the Bank of Japan's last policy meeting in January, economists at Barclays and BNP Paribas have brought forward their rate hike forecasts to April.

While it is unclear if other board members share Tamura's view, his remarks suggest Governor Kazuo Ueda could face more opposition if he opts to keep policy unchanged at the next meeting concluding in April. Tamura, formerly of Sumitomo Mitsui Financial Group, along with colleague Hajime Takata, is known for frequently dissenting and advocating a faster pace of policy normalization. At the January meeting, Takata voted for consecutive rate hikes, lending a hawkish tone to the decision to stand pat.

The Bank of Japan is scheduled to announce its next policy decision on March 19, the same day the Prime Minister is planned to meet with the U.S. President in the United States.