Bank of Japan hawkish member: Raise interest rates every few months, with a neutral rate target of 2%.

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Bank of Japan's most “hawkish” official speaks out: Accelerate the pace of rate hikes, pushing interest rates toward the neutral level of 2%.

Naoki Tamura, Policy Board Member of the Bank of Japan, gave a speech on Thursday, clearly calling for the central bank to raise rates every few months and to gradually push the policy rate toward his estimated neutral rate of 2%. At the same time, BOJ Deputy Governor Ryozo Himino pointed out that the global AI boom has led to a sharp rise in Japan's export prices, offsetting the drag from higher oil prices on the economy, and that downside risks to the economy have significantly diminished.

Last week, the Bank of Japan raised its policy rate to 1%, the highest level since 1995. According to a Bloomberg survey, about 90% of economists expect another rate hike within the year, with more than half expecting the timing in December and 36% expecting October.

Naoki Tamura: Raise rates every few months, "act without hesitation" if upside risks intensify

On Thursday, Naoki Tamura gave a speech in Hyogo Prefecture at a meeting with local business representatives, clearly laying out his plan for the rate hike path.

"The baseline path I envision is to raise rates by 25 basis points every few months, gradually approaching the neutral rate level of 2%," Tamura said.

He also stated that if inflationary pressures intensify further, the central bank needs to act more decisively: "If the likelihood of upside risks to prices increases, I believe it is necessary to accelerate the pace of rate hikes without hesitation, increasing frequency or magnitude." He also specifically mentioned Middle East conflicts and other factors which may push up inflation.

Naoki Tamura is recognized as a hawk within the central bank, formerly working at Sumitomo Mitsui Financial Group, and has long advocated for faster normalization of rates. At the April meeting, he voted together with Hajime Takata and Junko Nakagawa in favor of higher rates, which added a hawkish tone to an otherwise wait-and-see decision. At last week’s decision, he, along with other members, unanimously voted to raise the rate to 1%.

It is worth noting that while Tamura’s comments suggest the pace of rate hikes could be faster than current market consensus, it also means he is unlikely to support another hike immediately in July— unless there is imminent inflationary pressure.

AI exports' increase in both volume and price offset oil price shock

Tamura’s hawkish stance is backed by macroeconomic data.

According to the Bank of Japan data cited by Bloomberg, Japan’s export price index rose by 11.7% year-on-year in May, marking the largest increase since April 1979. Among them, export prices of electrical and electronic products surged by 23.9%, the largest since comparable data began in 1976.

The main driving force behind this is the global AI boom. Although Japan is not a major producer of advanced AI chips, its companies play a key role in the global semiconductor supply chain, particularly in manufacturing equipment and materials.

On June 19, BOJ Deputy Governor Ryozo Himino explained this logic shift in a parliamentary session. He stated that at the April monetary policy meeting, the central bank was concerned about the risk that rising oil prices would push up import prices, worsen the terms of trade, and create downward pressure on the economy.

"But recently, the most noteworthy dynamic is the sharp rise in export prices," Himino said. "Driven by the AI boom, not only have the export quantities of semiconductor manufacturing equipment and other AI-related products increased, but prices have also risen significantly. In a certain sense, this seems to be offsetting the negative impact of higher oil prices."

The summary of last week’s policy meeting confirms this assessment. One member stated: "With external economies rebounding due to demand shocks from the global expansion of AI-related demand, the deterioration in trade terms reflected by higher oil prices has eased, and worries about an economic slowdown have receded." Another member noted: "Global AI-related demand is driving economic activity and prices to rise more than expected."

Rate hike path: Expectations for another rate hike this year intensify, but political resistance remains

Improvements in macro fundamentals and hawkish voices within the central bank have jointly reinforced market expectations for another rate hike this year.

Bloomberg's survey shows that after last week's rate hike, about 90% of economists expect another hike within the year, with over half expecting December and 36% expecting October.

However, political resistance remains. Japanese Prime Minister Sanae Takaichi is seen as a supporter of easy money policies, and her government has repeatedly stated that it hopes the central bank will consider government policy when making decisions.

In response, Tamura was clear in his speech: "In my view, the central bank's mission is to act as the 'guardian of price stability' while maintaining full communication with the government."

Bank of Japan Governor Kazuo Ueda also reiterated the central bank’s position on Wednesday, saying it would continue hiking rates based on the economy and inflation, but did not give a clear signal about the timing of the next hike.

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