Exclusive: Former BOJ Governor Kuroda Advocates for Rate Hikes and Tight Fiscal Policy
In a recent interview, former Bank of Japan Governor Haruhiko Kuroda emphasized the need for the BOJ to gradually raise interest rates towards a neutral level, citing the country's robust economic performance. Kuroda suggests that the BOJ can likely hike rates approximately twice annually in 2026 and 2027, a stark contrast to the current administration's approach.
Kuroda's stance on fiscal policy is equally firm. He warns that the government's big spending and tax cut plans could inadvertently fuel inflation, a concern that has been heightened by the recent weakness of the yen. This divergence in policy thinking between Kuroda and the current Prime Minister, Sanae Takaichi, highlights the evolving economic landscape in Japan.
Kuroda's tenure as BOJ Governor ended in 2023, marked by a decade-long push to stimulate growth and inflation through unconventional policy tools. The BOJ has since exited Kuroda's stimulus, raising rates several times, including in December 2024, as inflation surpassed the 2% target and the job market tightened.
In contrast, Takaichi, a supporter of Abenomics, has increased spending and pledged to suspend an 8% sales tax on food for two years to mitigate rising living costs. Kuroda warns that such expansionary fiscal policy could backfire, fueling inflation and raising bond yields.
The market's attention has shifted to Takaichi's potential calls for loose fiscal and monetary policy, following her substantial election win on February 8. A news report suggesting Takaichi's reservations about further rate hikes has added to the tension, indicating potential friction over monetary policy that could complicate the BOJ's rate-hike timetable.
Kuroda also addresses the yen's recent weakness, suggesting it might be 'somewhat too weak' when judged against its equilibrium set by Japan's near-term growth, price moves, and economic competitiveness. He acknowledges the temporary effect of currency intervention but notes the uncertainty of sustained impact.
Looking ahead, Kuroda believes the BOJ has the scope to raise its key policy rate to around 1.5-1.75% in the coming years if the economy maintains its momentum. Despite the elusive inflation target during his term, Kuroda's stimulus efforts helped reverse the yen's relentless rise, benefiting Japanese exporters.
Kuroda's communication style, characterized by bold and simple messaging, aimed to convince the public that price increases were imminent after decades of deflation. However, he now advocates for a low-profile approach as the BOJ normalizes policy without causing economic disruptions.
