MNI INTERVIEW: Ex-BOJ's Sakurai Sees April Hike, 1.5% Rate

The Bank of Japan is likely to raise its policy rate by 25 basis points to 1.00% at the April 27-28 meeting, and could lift it to at least 1.5% over FY2026, with the terminal rate potentially reaching 1.75%, former BOJ board member Makoto Sakurai told MNI.

Sakurai expects three rate hikes over the next two fiscal years – either one in 2026 and two in 2027, or two in 2026 and one in 2027 – as the BOJ faces the challenge of breaking the vicious cycle of high inflation, fiscal expansion, and a weak yen.

“However, if the yen weakens toward JPY160-JPY170, three hikes may not be enough, pushing the policy rate to 1.75%,” he warned. “The yen rebounded to the JPY154 level from JPY159, but it remains weaker than when Prime Minister Sanae Takaichi took office, keeping pressure on import prices and domestic inflation. That in turn paves the way for the BOJ to raise rates in April. That’s my main scenario."

April’s rate hike – currently assigned a 46% probability by markets – is not aimed at decisively strengthening the yen, though December’s increase has helped slow its decline, he added. (See MNI BOJ WATCH: Ueda Points To Hikes, Gives No Clues On Timing)

GOVERNMENT SPENDING

"The current economic and inflation conditions don’t justify such spending; rather, fiscal expansion has been driving yen weakness,” Sakurai said, citing Takaichi's plans to introduce large-scale stimulus measures worth JPY21.3 trillion, alongside a fiscal 2026 budget of JPY122.3 trillion.

He criticized the government for not clarifying financial resources, despite Takaichi’s insistence that there would be no “irresponsible bond issuance or tax cuts.” A lower house election win on Feb 8 could give Takaichi the false impression that fiscal expansion enjoys public support, which Sakurai called “very dangerous,” and could prompt U.S. authorities to press Japan on currency and interest rate policies.

JGB YIELDS

Another concern is the BOJ’s response to rising JGB yields, Sakurai continued, noting the Bank could elect to conduct extraordinary bond-buying operations in an emergency. (See MNI POLICY: BOJ Sees Little Chance Of JGB Intervention) "But such moves are interpreted as market intervention, which could worsen fiscal discipline and trigger further yen selling,” he argued.

However, he believes Takaichi and Finance Minister Satsuki Katayama have come to recognise the need to take volatile financial markets into account, having learned a harsh lesson from the recent surge in JGB yields and the yen’s slide triggered by the government’s inappropriate policy approach.

Highlighting the risk of unrealised losses on JGBs held by commercial banks and life insurers, Sakurai noted that how these institutions manage those losses will be closely watched by global markets, with potential implications for the stability of the yen.

Finally, Sakurai said the BOJ must monitor inflation closely. The central bank expects the year-on-year increase in core CPI to fall below 2% in the first half of the year. “If core CPI doesn’t slow as much as the BOJ predicts, the bank may face renewed upward pressure on prices and underlying inflation,” he said.