Bank of Japan Hawkish Big Shot: Interest Rates Heading Straight to 1%! Will the USD/JPY Exchange Rate See a Major Reversal?

According to the Zhitong Finance and Economics APP, Naoki Tamura, a hawkish decision-maker at the Bank of Japan, delivered a speech on Thursday emphasizing that the Bank of Japan should raise interest rates to at least 1% in the second half of the next fiscal year at the earliest. This statement further strengthens the Bank of Japan's determination to steadily advance its tightening monetary policy. This is the first time that Bank of Japan decision-makers have clearly stated the ultimate target level for raising short-term borrowing costs.

After Tamura's hawkish speech, the USD/JPY rose to 143.00 but failed to sustain the upward momentum. Currently, it seems to have interrupted the rebound from the near nine-month low touched the previous day, with the USD/JPY exchange rate standing at 142.85 as of the time of writing.

Following Tamura's hawkish remarks, the USD/JPY exchange rate briefly climbed to 143.00 but failed to maintain this upward trend. Currently, it appears that the exchange rate has interrupted the rebound trend that started from the near nine-month low touched the previous day, with the USD/JPY exchange rate at 142.66 as of the time of writing.

Bank of Japan Hawkish Leader: Raise Rates to 1% by October 2025 at the Earliest

It is understood that Tamura believes that as the Japanese economy continues to move towards achieving the Bank's 2% inflation target, the conditions for raising interest rates are gradually maturing. He expects that Japan's neutral interest rate - a rate level that neither suppresses nor stimulates economic growth - should be at least around 1%. In a speech to business leaders in Okayama City, Tamura pointed out, "In order to sustainably achieve the Bank of Japan's price target, it is necessary to raise short-term policy rates to at least around 1%."

The Bank of Japan's current three-year growth and inflation forecast covers the fiscal years 2024 to 2026, effectively extending until March 2027. Tamura suggested that the Bank should accelerate the pace of rate hikes so that in the latter half of the three-year forecast period, potentially by around October 2025 at the earliest, short-term borrowing costs could be raised to 1%.

At a press conference following the meeting with business leaders, Tamura stated that he has no preconceived ideas about the path and speed of adjusting monetary support. He said, "We may gradually raise rates in stages while carefully studying the impact of each rate hike on economic activity." When asked whether there would be another rate hike before the end of this year, Tamura declined to comment.

Prior to Tamura's above-mentioned remarks, members of the Bank of Japan's board have repeatedly called for the Bank to continue raising borrowing costs despite recent financial market volatility. It is expected that the Bank of Japan will keep rates unchanged at the next meeting on September 20th, but more than half of the economists surveyed by Reuters last month predicted that the Bank will further tighten policy by the end of this year.

The Bank of Japan abandoned its negative interest rate policy in March and raised short-term rates to 0.25% in July as the Bank believed the economy was moving towards achieving the 2% inflation target sustainably. Bank of Japan Governor Haruhiko Kuroda stated that if the inflation rate remains around 2% in the coming years and wages continue to rise steadily, the Bank is prepared to further raise rates Tamura expressed concerns about the escalating risks of inflation in his speech, as labor shortages are prompting businesses to raise wages and pass on cost increases through price hikes. He emphasized, "We must raise interest rates in stages at the appropriate time." The market generally considers him to be one of the most hawkish members among the nine members of the Bank of Japan.

Divergence in Japanese and American Inflation and Monetary Policy Intensifies USD/JPY Volatility

In July, Japan's core consumer inflation rate reached a significant 2.7%, marking the 28th consecutive month that the country's inflation rate has met or exceeded the Bank of Japan's 2% target, demonstrating the continuous progress of the Japanese economy in price stability. However, in the core consideration of monetary policy, the neutral interest rate as a key indicator, with its unobservable nature, requires policymakers to rely on complex economic models for estimation to accurately guide the direction of monetary policy.

Meanwhile, data released by the U.S. Bureau of Labor Statistics on Wednesday showed that the core Consumer Price Index (CPI), excluding food and energy costs, rose by 0.3% in August compared to July, marking the largest increase in four months, with a year-on-year increase of 3.2%. The three-month annualized growth rate accelerated from 1.6% in July to 2.1%, indicating that the potential for rising core inflation in the United States still exists, weakening market expectations for a significant 50 basis point rate cut by the Federal Reserve next week. This change helped the U.S. dollar regain upward momentum, pushing the USD/JPY exchange rate close to its monthly high. At the same time, the increase in market risk appetite further weakened the performance of the safe-haven asset Japanese yen, prompting the USD/JPY exchange rate to rise.

It is worth noting that Japan's Producer Price Index (PPI) unexpectedly declined by 0.2% in August, with the annual growth rate slipping from 3.0% to 2.5%, a larger decline than market expectations, undoubtedly exerting additional downward pressure on the yen. However, the statement by Bank of Japan board member Naoki Tamura brought a slightly different voice to the market. He emphasized that the road to ending loose monetary policy is long and difficult, reaffirming market expectations for a further increase in borrowing costs by the end of this year, which to some extent limited the yen's decline.

On the other hand, the market widely expects the Federal Reserve to implement a 25 basis point rate cut at its policy meeting on September 17-18. This expectation contrasts sharply with the relatively hawkish stance of the Bank of Japan, further intensifying the volatility of the USD/JPY exchange rate. Against this backdrop, although fundamental analysis points to downward pressure on the USD/JPY, traders are closely watching the upcoming release of the U.S. Producer Price Index, hoping that this key data will provide new directional guidance for the market and drive a new round of movements in the USD/JPY exchange rate