Cailian Press, September 12th (Editor: Liu Rui) This Thursday, board member Namiki Tamura of the Bank of Japan sent a strong hawkish signal to the outside world: the magnitude of the future increase in interest rates by the Bank of Japan may be larger than many economists expected.

He pointed out that Japan's neutral policy interest rate is 1% or higher. Moreover, the Bank of Japan may have to raise interest rates rapidly.

"Strong Hawkish" Speech

In a speech to business leaders, Tamura said, "In the latter half of the Bank of Japan's forecast period (i.e. by the 2026 fiscal year), I believe we need to raise short-term interest rates to at least around 1%. This is necessary to control the risk of rising prices and achieve stable and sustainable inflation targets."

Following his statement, the yen rose against the U.S. dollar at one point, but later gave back its gains.

Tamura is the most hawkish member among the nine members of the Bank of Japan's committee. His speech is undoubtedly a clear signal that the Bank of Japan needs to gradually raise rates from the current 0.25%.

Tamura also bluntly stated in his speech that he believes Japan's nominal neutral interest rate is at least around 1%. The nominal neutral interest rate refers to the level at which neither restrictive nor stimulative policies are adopted.

Previously, the Governor of the Bank of Japan, Haruhiko Kuroda, and other board of directors members never specifically proposed the exact level of Japan's neutral interest rate. Therefore, Tamura can be considered the first important official to clearly provide an estimate of the neutral interest rate.

Tamura believes that policymakers are best to have an estimated level of the neutral interest rate in mind, as doing so helps them to formulate policies in a timely manner.

The pace of recent interest rate hikes depends on the economic situation.

However, when Hitoshi Tanamura discussed the future pace of interest rate hikes at the Bank of Japan, he still adopted a relatively conservative statement. He said, "We need to closely monitor the Japanese economy's response to changes in interest rates, without any preconceptions."

When Tanamura was asked whether there would be another interest rate hike in the remaining time of this year, he chose an ambiguous answer - it may or may not happen.

Tamura stated, "I have no preconceptions about the speed of interest rate hikes, because it depends on the economic, inflation, and financial conditions. But unlike the USA and Europe, this may be a gradual process."

The day before, Junko Nakagawa, a member of the Bank of Japan's board of directors, expressed a similar attitude. She clearly expressed support for future interest rate hikes by the Bank of Japan, but she also hinted that there is almost no need to take policy measures at the next Bank of Japan interest rate decision meeting.

Are market expectations too conservative?

Tamura also stated that the market's pricing of the Bank of Japan's policy path may be too slow, and he pointed out that if the central bank sticks to its expected path, the Bank of Japan may eventually have to raise interest rates quickly.

Some economists believe that considering Tamura's past words and actions, many of his words can serve as leading indicators of the Bank of Japan's policy thinking.

In August 2023, Tamura said that the Bank of Japan may achieve its 2% inflation target in early 2024. This statement has sparked speculation about the Bank of Japan ending its negative interest rate policy. As it turns out, in March of this year, the Bank of Japan ended its long-term negative interest rate policy, which came earlier than many economists expected.

Tamura also pointed out in December 2022 that it is necessary to conduct a comprehensive policy review. Then, in April 2023, Bank of Japan Governor Uchida Haruo announced that the bank would conduct a policy review.