BOJ Eyes Aggressive Rate Hikes to Combat Inflation

Japan's battle against inflation may be about to intensify as the Bank of Japan (BOJ) considers shifting its stance from tolerating price rises to actively fighting them, according to Tsutomu Watanabe, a former central bank official and expert on price trends.

The third wave of inflation in Japan is expected to be more modest than the past two, which were triggered by the Ukraine war and domestic wage hikes, respectively. However, underlying inflation is rising and is now close to 2%, lifting wage growth and inflation expectations.

Watanabe estimates that if the BOJ maintains its current slow pace of rate hikes, underlying inflation could overshoot to 2.2% around July next year, which would be 'pretty problematic' and force the BOJ to raise rates aggressively later.

The timing of a shift in the BOJ's stance will depend on next year's wage outlook, with Watanabe suggesting that if comments from labour unions and business lobbies suggest solid wage gains, the BOJ will shift to an 'inflation fighter' mode as soon as December.