MNI INTERVIEW: Weaker Yen To Drive Sept Hike -Ex-BOJ's Sakurai

The Bank of Japan will likely raise the policy interest rate to 1.25% from 1.0% in October, although a weaker yen approaching JPY165 could prompt policymakers to move as early as September, former BOJ board member Makoto Sakurai told MNI, forecasting a terminal rate of 2.0-2.5% by 2028.

"My main scenario is an October rate hike, when economic data for the July-September quarter will be available," said Sakurai, who served on the BOJ's board from 2016 to 2021. "Looking ahead, inflation will likely accelerate further, increasing pressure on the BOJ to raise the policy rate based on the same logic it adopted in June, namely easing downside risks to the economy and rising upside risks to prices."

Sakurai had given a June hike a 50-50 chance when interviewed by MNI in May, with Governor Kazuo Ueda's appetite for containing inflation the deciding factor. (See MNI INTERVIEW: Ex-BOJ's Sakurai Sees 50-50 June Hike Odds)

This time, Sakurai said a weaker yen could increase the likelihood of a September hike if it approaches JPY165, adding the government would not oppose tighter policy under those circumstances due to pressure from U.S. authorities.

If inflation accelerates further, the BOJ could deliver another hike later this fiscal year after raising rates in either September or October, he said. Sakurai expects the terminal rate to reach 2.0-2.5%, depending on inflation, with the policy rate rising to at least 2.0% before Governor Kazuo Ueda's five-year term ends in April 2028.

Delaying further tightening would leave the BOJ behind the curve and trigger a much weaker yen, he warned.

Overnight index swaps imply around a 20% chance of a September hike, with 40% priced for the October meeting and a 1.22% policy rate expected by December.

FISCAL CONCERNS

Sakurai cited the government's proposed consumption tax cut, its Honebuto no Hoshin growth strategy, budget requests for fiscal 2027 and a second supplementary budget for the current fiscal year as factors that would increase selling pressure on the yen, potentially pushing it to JPY170-180 against the dollar.

"Prime Minister Takaichi doesn't understand the warnings from market participants who are deeply concerned about Japan's fiscal position, although she does pay some attention to market volatility," he said, arguing the yen had continued to weaken and long-term interest rates had risen because of declining confidence in her fiscal policy. "Takaichi isn't afraid of Ueda, but she is paying close attention to U.S. Treasury Secretary Scott Bessent, who sees a weak yen and high JGB yields as troublesome for U.S. financial markets."

The dollar traded around JPY162.60 in Tokyo on Thursday, below the levels that prompted Japanese authorities to intervene in the foreign exchange market in late April and early May. Sakurai said the key question is how much further dollar/yen can rise before Bessent loses patience, adding that Washington views Japan as responsible for the yen's weakness.

BOND YIELDS

Long-term bond yields continue to climb because of persistent concerns over Japan's fiscal outlook amid Takaichi's expansionary policies, he said.

The benchmark 10-year JGB yield rose to 2.885% on Thursday, its highest level since October 1996, a level Sakurai said was not especially high in absolute terms. But the pace of the increase was placing significant strain on smaller financial institutions and life insurers, he noted, adding that the yield could rise toward 3%.

The rapid rise in yields has discouraged institutional investors from buying JGBs, creating a vicious cycle in the bond market. Persistently high yields alongside rising inflation risk destabilising Japan's financial system, he warned.