Bank of Japan (BOJ) board member Naoki Tamura's remarks on Thursday (Feb. 6) have boosted the yen, as he suggested interest rates should reach at least 1% in the second half of the fiscal year starting in April 2025. Tamura, known for his hawkish stance, indicated that the BOJ should act in response to rising inflationary pressures from rising raw material and labor costs.

Tamura's remarks have fueled market expectations of a near-term rate hike, with the yen strengthening against the dollar, which fell to a two-month low of 151.81 yen. Furthermore, the yield on the two-year Japanese government bond (JGB) rose to 0.765%, a level not seen since October 2008, as markets now price in about a 50% chance of a rate hike in July.

The hawkish board member noted that companies and households likely already have inflation expectations at the BOJ's 2% target. But he stressed the need for the BOJ to carefully time its rate hikes to avoid a shock to a public accustomed to ultra-low interest rates. "Given that short-term interest rates should be around 1% in the second half of fiscal 2025, I think the Bank needs to raise rates in a timely and gradual manner," Tamura said in a speech to business leaders in Nagano.

Tamura's remarks came after the BOJ raised interest rates last month to 0.5%, the highest since the 2008 global financial crisis, signaling its confidence that Japan is on track to sustainably achieve its 2% inflation target. BOJ Governor Kazuo Ueda has indicated a willingness to continue raising rates if rising wages support consumption and businesses' ability to raise prices, though he has not yet set a neutral interest rate for Japan.

The lawmaker's remarks also followed recent data showing broad-based wage gains, including a survey released Wednesday that showed a steady increase in basic wages in December. The shift in wage dynamics marks a shift away from former Governor Haruhiko Kuroda's aggressive stimulus policies, which were aimed at reviving growth. (Newsmaker23)

Source: Investing.com