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on thursday, bank of japan board member naoki tamura sent a strong hawkish signal to the outside world: the bank of japan may raise interest rates more in the future than many economists expect.

he noted that japan's neutral policy rate is 1% or higher and that the bank of japan will likely have to raise rates quickly.

the "big hawk" made a strong statement

“i think thatin the second half of the bank of japan's forecast period (i.e. until fiscal 2026), we need to raise short-term interest rates to at least around 1%.this is necessary to contain the risk of rising prices and achieve our inflation target of being stable and sustainable.”

the yen briefly rose against the dollar after his comments before giving up gains.

tamura, the most hawkish of the nine-member boj board, sent a clear signal that the central bank needs to gradually raise interest rates from the current 0.25 percent.

tamura also said 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, bank of japan governor kazuo ueda and other board members had never precisely proposed the specific level of japan's neutral rate, so tamura could be considered the first key official to clearly give an estimate of the neutral rate.

tamura believes that it is best for policymakers to have an estimate of the neutral interest rate in their minds because doing so will help them formulate policies in a timely manner.

the pace of recent rate hikes depends on economic conditions

however, when talking about the future pace of interest rate hikes by the bank of japan, naoki tamura still took a relatively conservative approach. he said: "we need to pay close attention to the reaction of the japanese economy to interest rate changes and not have preconceived ideas."

when tamura talked aboutwill there be another rate hike in the rest of this year?when asked, he chose an ambiguous answer:maybe or maybe not。

“i don’t have any preconceived notion about the pace of rate hikes as it depends on economic, inflation and financial conditions,” tamura said. “but unlike the united states and europe, it will probably be a gradual process.”

the comments came a day after bank of japan board member junko nakagawa expressed a similar tone, clearly supporting future rate hikes by the bank of japan, but she also suggested there was little need for policy moves at the central bank's rate-setting meeting next week.

are market expectations too conservative?

tamura also said,markets may be pricing in too slow a path for the bank of japan policy, he pointed out, if the central bank sticks to its expected path,the bank of japan may eventually have to raise interest rates quickly.

some economists believe thatconsidering tamura's past words and deeds, many of his remarks could serve as leading indicators of the bank of japan's policy thinking.

in august 2023, tamura said the bank of japan could achieve its 2% inflation target by early 2024, sparking speculation that the central bank would soon end its negative interest rate policy. and sure enough, in march 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 a broad policy review was necessary. then in april 2023, bank of japan governor kazuo ueda announced that the bank would conduct a policy review.