BOJ likely to hike rates to 1.5% under Ueda, former board member predicts

Former Bank of Japan board member Makoto Sakurai projects the central bank will raise its benchmark interest rate at least four more times to 1.5% by early 2028, with the next hike anticipated in October or December. This aggressive monetary policy normalization is driven by Japan's robust economy, strong corporate profits, and potential pressure from U.S. weak-dollar policies, signaling a likely strengthening of the yen as the Federal Reserve potentially cuts rates. The upcoming "tankan" business survey and recent board dissents are seen as key indicators for an imminent move.

Analysis

A hawkish outlook for the Bank of Japan (BOJ) is crystallizing, with former board member Makoto Sakurai projecting a clear path toward monetary policy normalization. He anticipates at least four additional rate hikes, targeting a benchmark rate of 1.5% by early 2028, with the next increase potentially occurring in October or December of this year. This policy pivot is underpinned by a robust domestic economy, where large corporations are reporting "hefty profits" driven by price increases and a weak yen's boost to exports. The impending "tankan" business survey on October 1 is a critical catalyst, as a strong reading could provide the justification for an October hike. Internal board dynamics support this view, with two recent dissents against holding rates steady interpreted as a deliberate signal of an approaching move. Furthermore, external pressure from the U.S., including comments about the BOJ being "behind the curve" and a joint statement discouraging FX intervention, suggests limited ability for Japan to combat yen appreciation through market actions. Consequently, the diverging paths of a hiking BOJ and a rate-cutting Federal Reserve are expected to lead to a trend of a stronger yen versus the dollar.

Key Decisions for Investors

• Investors should evaluate positions that benefit from a stronger yen, as the forecasted divergence between BOJ rate hikes and potential Federal Reserve cuts points to a structural strengthening of the currency.
• A review of Japanese equity portfolios is warranted, specifically to assess a potential rotation away from large exporters who have benefited from yen weakness and may face headwinds from a stronger currency.
• Given the projection of steady rate increases, caution is advised for holdings in long-duration Japanese government bonds, with a preference for shorter-duration instruments to mitigate price risk.
• Closely monitor the BOJ's quarterly 'tankan' survey on October 1, as a resilient report on corporate morale and profits could serve as the primary catalyst for a near-term rate hike and accelerate market repricing.