MNI INTERVIEW: BOJ Most Likely To Hike In January - Momma

The Bank of Japan is most likely to raise its policy rate from 0.50% to 0.75% in January 2026, but a hike in October cannot be ruled out if the yen weakens, a former BOJ executive director in charge of monetary policy and chief economist told MNI.

“January is the favoured option in my baseline scenario. But if everything goes smoothly and favourably, a rate hike in October will be feasible,” Kazuo Momma, who left the BOJ in 2016 and is now executive economist at Mizuho Research and Technology, said in an interview.

Any further repricing of Federal Reserve rate cut expectations could weaken Japan’s currency against the dollar, perhaps prompting it to depreciate from the current 146 to 150 or 160, he said, noting that the weekend’s preliminary China-U.S. trade deal sent a message to investors that U.S. President Donald Trump will back down from radical trade policies, reducing the risk of a U.S. recession. Markets now factored in a “Trump put,” he said.

“If yen weakness accelerates, a rate hike in October would be a possibility as the Bank might have to respond,” Momma said, though he noted that continuing uncertainty over global tariffs still threatens some “wild card or a joker.”

The BOJ increased its policy rate last year as the yen weakened, raising inflationary risks, he noted, adding that Japan’s government would also look unfavourably on a lower currency, which could complicate relations with the U.S.

The U.S.’s Liberation Day tariff onslaught on April 2 has pushed back Momma’s expectations for a rate hike, which he had earlier expected by June, and he said that the BOJ is now worried about downside risks to the economy and prices as high uncertainty persists over trade talks.

“The earliest a hike could come would be around autumn, depending on how the currency behaves,” he said. (See MNI INTERVIEW: Ex-BOJ's Momma Sees June Hike, 1% Neutral)

HIGHER NEUTRAL

If the BOJ is successful in sustainably bringing inflation to its 2% target, with steady increases in services prices, Momma said a policy interest rate in the range of 0.5-1.0% would be too low, and the neutral rate of interest would lie towards the upper end of the BOJ’s estimated range between 1% and 2.5%.

While the BOJ will need to see how tariffs settle, and whether they will have a serious adverse impact on global growth as well as on corporate and consumer confidence, before it raises rates, the key requirement for monetary tightening will be the continuation of a virtuous cycle between increases in wages and prices, he said. (See MNI POLICY: Spending Concerns Weigh On BOJ Hikes)

“The key point is whether businesses will raise wages steadily amid falling corporate profits,” he said, pointing to carmakers in particular, “I think steady wage hikes are possible, as structural labour shortages continue and as the level of profits is still high, even though they will fall.”

Wage hikes in the second half of this year come could in at 4%, he said, though he thought the expectation in trade union confederation Rengo’s latest survey for wage hikes of 5.32% next year was too optimistic.

“High uncertainties continue. The BOJ will need to form a view on the scale of wage hikes by looking at profits, what business leaders say and what unions are calling for, which will be available from the end of this year to the beginning of next year,” Momma said.