Former Bank of Japan official: Trump brings risks, the possibility of raising interest rates again in March increases

Zhitong Finance learned that a former member of the Bank of Japan's policy committee stated that, given the increasing uncertainty brought by the election of Donald Trump as President of the United States, the possibility of the Bank of Japan delaying interest rate hikes until March is increasing. Makoto Sakurai, a former member of the Bank of Japan's Monetary Policy Committee, said in an interview on Wednesday, "There seems to be too much uncertainty when Trump comments on various issues. There may not be enough reason to support an interest rate hike in January."

As Makoto Sakurai spoke, observers of the Bank of Japan were looking for hints regarding interest rate hikes this month or later. Sakurai believes the likelihood of a rate hike in March is as high as 70%, as the Bank of Japan would be better off waiting at least until the first few months after Trump's new administration takes office.

Shortly before the interview, Trump called for the incorporation of Canada into the United States and stated that he does not rule out the possibility of "controlling the Panama Canal and Greenland through military or economic coercion." He also mentioned that he would soon rename the Gulf of Mexico to "American Gulf." This series of remarks undoubtedly indicates that he plans to elevate foreign policy to a new level of breaking precedents after taking office in less than two weeks.

Makoto Sakurai pointed out that the next interest rate hike could occur in January or March, with the last hike taking place in July due to the rapid depreciation of the yen. The yen has fallen to a nearly six-month low this week, with the dollar approaching the key level of 160 against the yen.

Since completing his five-year term in March 2021, Sakurai has maintained close contact with officials at the Bank of Japan. He stated that he does not believe the current level of the yen alone would prompt the Bank of Japan to raise rates this month. Sakurai indicated that if the Bank of Japan keeps rates unchanged in January, "the dollar may break through 160 against the yen, but this would make it easier for us to decide on action in March."

Bank of Japan Governor Kazuo Ueda emphasized the need to closely monitor U.S. economic policies during the new president's term but declined to disclose how long he needs to keep an eye on it. This leaves room for different interpretations among those observing the Bank of Japan.

Sakurai believes that the risks surrounding Trump are a reason to wait, but many economists argue that the Bank of Japan should adjust its policy before the risks become a reality. They point out that Japan's economic conditions have consistently aligned with the central bank's views.

Earlier this week, Ueda reiterated his position that the Bank of Japan would raise interest rates if economic conditions continue to improve. Traders estimate that the likelihood of a rate hike at the conclusion of the January 24 meeting is about 50%. As of Wednesday, this probability is expected to rise to around 80% by the March meeting.

In addition to the U.S. economy, the momentum of spring wage negotiations is also a key point emphasized by Ueda. Sakurai stated that if there are no global economic shocks, the preliminary results of wage negotiations announced in March could serve as a catalyst for a rate hike that month, just like last year Makoto Sakurai expects a gradual interest rate hike in the coming years: "The Bank of Japan may raise rates about twice a year, with the pace possibly varying depending on the economic situation at the time, potentially faster or slower. There's no need to rush."

The Bank of Japan has repeatedly stated that it is difficult to know the correct level of the policy rate before making a decision, especially considering that borrowing costs in Japan have been at extremely low levels for a long time. A document from the Bank of Japan suggests that the nominal neutral interest rate is between 1% and 2.5%. Makoto Sakurai believes this merely reflects the Bank of Japan's desire to maintain flexibility.

Sakurai stated, "They certainly have a target rate in mind. They just don't want to tie their own hands." He added that he expects rates to rise to nearly 2% by April 2028, when Kazuo Ueda's term ends