Former Bank of Japan Governor Haruhiko Kuroda recently suggested that raising interest rates to around 1.50% over the next year presents “no problem,” a statement that reinforces the narrative that Japan’s monetary policy normalization is far from over.
This isn't just an off-the-cuff remark; it's a signal that aligns with a series of economic developments, making it highly credible. The key question is why this path seems plausible now. The answer lies in a clear causal chain of events that has unfolded over the past two years.
First, the foundation was laid in March 2024 when the BoJ historically ended its Negative Interest Rate Policy (NIRP) and Yield Curve Control (YCC). This was the critical first step away from decades of ultra-loose monetary policy, re-anchoring the short-term policy rate as the primary tool.
Second, this policy shift was supported by real economic momentum. The 2025 'shuntō' (spring wage negotiations) resulted in the highest wage gains since 1991. This was followed by strong demands for 2026, averaging nearly 6%. This sustained wage growth is exactly what the BoJ needs to see to feel confident that inflation can remain sustainably around its 2% target.
Third, external factors and other market signals have added to the case for further hikes. A fragile yen, often trading in a zone that prompts intervention fears (155-160 per dollar), makes higher domestic interest rates an attractive tool for stability. Furthermore, 10-year JGB yields have already risen, showing that the market has priced in a higher terminal rate, which reduces the potential shock of future hikes.
While recent headline inflation figures have softened, this is largely due to temporary government subsidies on utilities. The core-core inflation, which excludes volatile food and energy prices, remains firm. This suggests underlying price pressure is intact. When combined with the IMF’s own forecast of a 1.20% policy rate by the end of 2026, Mr. Kuroda's comments paint a picture not of a radical new idea, but of a feasible upper boundary for policy in the coming year.
- Glossary
- Shuntō: The Japanese term for the annual spring wage negotiations between unions and management, a key indicator for national wage trends.
- JGB (Japanese Government Bond): Debt securities issued by the Japanese government to raise funds.
- Core-Core CPI: An inflation measure that excludes both fresh food and energy prices to provide a clearer view of underlying inflation trends.