MNI INTERVIEW: Ex-BOJ's Sakurai Sees 50-50 June Hike Odds

The Bank of Japan’s June rate decision is “a fifty-fifty chance,” with Governor Kazuo Ueda’s determination to contain inflation a key factor that could tip the balance toward a hike, former BOJ board member Makoto Sakurai told MNI, arguing the central bank should raise the 0.75% policy rate as inflationary pressures have become entrenched.

“If the BOJ doesn’t raise the rate in June, the bank will be driven into a corner and attacked by markets,” Sakurai said.

If the BOJ refrains from hiking at the June 15-16 meeting on the grounds of elevated uncertainty, there is no guarantee it would be able to move in July, he warned. A delayed hike would risk trapping the BOJ in a vicious cycle of persistently high inflation and weakening economic growth, while reinforcing market perceptions that the pace of BOJ tightening remains excessively slow and constrained by political pressure, he said.

A hike next month, however, would open an opportunity for a further increase again in or after October, he added.

Sakurai had called for a hike at the April meeting to 1% prior to the start of the Iran conflict. (See MNI INTERVIEW: Ex-BOJ's Sakurai Sees April Hike, 1.5% Rate)

STAGFLATION RISK

The BOJ faces a difficult dilemma between maintaining a wait-and-see approach amid heightened uncertainty and falling further behind the curve, Sakurai continued. Even if tensions in the Middle East ease, supply constraints are likely to persist, increasing the risk of stagflation, he said, adding the central bank ultimately bears responsibility for containing inflation.

The BOJ could eventually be forced into multiple additional rate hikes should inflation rise to 5% or higher, potentially increasing the risk of a sharp correction in equity and real-estate markets, he warned. “It is obvious that the impact of yen-buying intervention on dollar-yen is limited," he said. "Unless the BOJ changes market players’ perception through rate hikes, the weak yen trend will continue, possibly weakening close to JPY170."

The yen briefly touched JPY160 against the dollar in late April before rebounding into the JPY156 range, a move likely driven by Ministry of Finance (MOF) intervention.

JGB PURCHASES

Sakurai said the central bank is likely to maintain its current pace of tapering to avoid destabilising markets, amid the BOJ's review of its JGB purchase reductions. 

“MOF's Financial Bureau hopes the BOJ will not accelerate reductions in JGB buying as upward pressure on yields remains strong," he noted. "Prime Minister Takaichi has ruled out a supplementary budget for now, but the government will eventually need to compile one involving substantial JGB issuance."

He added that even if the BOJ maintains its current pace of tapering, the size of its balance sheet will still shrink steadily and at a faster pace than that of the U.S. Federal Reserve.