Bank of Japan May Hike Rates in March Amidst Inflationary Pressures and Tariffs

Tokyo - The Bank of Japan (BOJ) is considering raising interest rates in March, prompted by inflationary pressures fueled by global tariffs, warned former BOJ board member, Sayuri Shirai.

With the ongoing threat of President Trump's tariffs on imports, inflation is rising globally, which could impact Japan's domestic economy. Shirai emphasizes the significance of March as a potential time for the BOJ to address these concerns, as inflation is already high in Japan.

A recent Reuters poll suggests that most economists anticipate the BOJ raising rates once more in Q3 to 0.75%. However, money markets indicate that investors expect a 70% probability of two additional hikes this year.

Shirai, now a professor at Keio University, stresses the need for the BOJ to counter the weak yen, which is contributing to higher food and energy prices.

Despite the weak broader economy, the BOJ must continue raising rates to mitigate the impact of the weak currency. Shirai believes that the BOJ should acknowledge the weak yen's inflationary effects and continue its path of rate increases.

Although the yen has rebounded from its three-decade low, analysts believe it remains undervalued, leading to increased import costs.

The BOJ ended its massive monetary stimulus last year and raised its short-term rate to 0.5% in January. Governor Kazuo Ueda has indicated a willingness to continue raising rates if wages rise and support consumption.

Shirai suggests that if the BOJ raises rates to 0.75% in March, it could increase them further to 1.0% later this year, depending on the impact of Trump's tariffs on the yen. She acknowledges uncertainty surrounding the consequences of Trump's policies but believes the BOJ is eager to raise rates to retain room for future cuts during economic downturns.

Shirai dismisses concerns about using monetary policy to influence exchange rates, stating that G7 and G20 agreements aim to prevent currency devaluation for trade advantages. She believes that Japan's efforts to prevent excessive yen declines through rate hikes will not elicit complaints from international counterparts.