(Bloomberg) -- The Bank of Japan is set to continue raising its benchmark interest rate toward 1% for now and will likely look for further rate hike opportunities afterwards depending on economic conditions, according to a former deputy governor of the central bank.
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"The environment for continued interest rate hikes is reasonably well prepared in Japan," former deputy Hiroshi Nakaso said at a press conference in Tokyo Tuesday. "The bank should continue raising interest rates as much as possible, making appropriate judgments at each meeting."
Nakaso emphasized the importance of creating room for future policy adjustments as needed, adding that the interest rate is the most effective tool for influencing the economy.
His remarks come as market participants debate the likely terminal rate of the central bank's current tightening cycle. The BOJ conducted its third rate hike since March 2024 last month, raising the policy rate to 0.5%, the highest level since 2008.
Governor Kazuo Ueda indicated then that more rate increases are likely, noting that the bank is still some distance from the neutral rate. A paper prepared by bank officials last autumn estimated that the neutral rate could be between 1% and 2.5% in nominal terms.
Traders are also closely watching the timing of the next rate hike, with most economists expecting the move around the summer. Nakaso suggested that the Japanese economy is on track for continued rate hikes, noting that it's unlikely to experience a significant downturn due to improving wage trends and the strength of the US economy.
The former BOJ official, who is currently chairman of Daiwa Institute of Research, highlighted the importance of the bank communicating clearly with the market, and explaining the reasoning behind each decision in a consistent manner.
In the January meeting, the BOJ managed to raise its rate with minimal market impact due to clear signaling in advance, in contrast to the July meeting, when the bank was criticized for surprising traders and helping to trigger a global market meltdown.
Separately, Nakaso said that Japan needs to lower its government debt-to-GDP ratio to a more reasonable level, warning that it is risky to assume that financial stress will have no adverse effects in the future.