In an exclusive interview with Reuters, former Bank of Japan chief, Haruhiko Kuroda expressed concerns about potential inflationary upswing coming from Takaichi’s big spending plans and a weak yen. Kuroda is famous for leading the BoJ during the Abenomics era. He launched a massive monetary stimulus in 2013 in an attempt to bring Japan out of deflation.
Now, Kuroda is calling for tighter monetary and fiscal policy as the economic context is the opposite of what he experienced in the last decade. “When Abenomics was deployed, Japan was suffering from deflation and a strong yen. Now, Japan is experiencing inflation and a weak yen. Japan needs to move toward tighter fiscal and monetary policy”, he said. Kuroda added that he expects the BoJ to raise rates to around 1.50-1.75% in the coming years if the economy can sustain its momentum.
As a reminder, the BoJ held interest rates steady as expected at the last policy meeting and upgraded slightly growth and inflation forecasts due to the expansionary fiscal policies. Governor Ueda didn’t offer anything new in terms of forward guidance as he just repeated that they will keep raising rates if the economic outlook is realised.
He also added that April price behaviour will be a factor to mull over a rate hike. This suggests that April is when they expect to deliver another rate hike if the data supports such a move. The market is expecting the next hike in June at the earliest with a total of 47 bps of easing priced in by year-end.
The rate hike expectations continue to be pushed further out amid easing Japanese inflation data and Takaichi’s opposition for further tightening. Just yesterday, the yen weakened across the board after Mainichi reported that Prime Minister Takaichi expressed reservations about further rate hikes with BoJ Governor Ueda in their meeting last week.
At the moment, it’s hard to envision any change in monetary or fiscal policy in the near-term, so the markets will likely be sticking with the “Takaichi trade” (weak yen, higher bond yields and rising stock market).
