Former Bank of Japan Governor Haruhiko Kuroda calls for interest rate hikes and tightening fiscal policy.

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On February 25, former Bank of Japan Governor Haruhiko Kuroda stated that as Japan's economic conditions have significantly improved, the Bank of Japan must continue raising interest rates, while the government should also tighten fiscal policy.

According to Reuters, Kuroda predicts that the Bank of Japan may raise interest rates about twice yearly in 2026 and 2027, gradually moving the current policy rate toward a neutral level for the economy.

He warned that the large-scale spending and tax cut plans launched by Prime Minister Sanae Takaichi may backfire and exacerbate inflationary pressures. Earlier reports indicated that Takaichi held a reserved attitude toward further rate hikes, which has led to downward pressure on the yen's exchange rate.

This statement highlights the significant divergence between the former architect of quantitative easing and the current government regarding economic policy direction, providing a key reference for markets assessing Japan's future interest rate path and yen trends.

Call for Dual Tightening of Monetary and Fiscal Policy

In an interview with Reuters, Haruhiko Kuroda pointed out that Japan's economy is currently in a "good state," not only achieving steady growth but also seeing wages rise steadily. Against this backdrop, the Bank of Japan has room to gradually raise its current policy rate of 0.75% to about 1.5%–1.75% in the coming years.

He recalled that during the initial implementation of "Abenomics," Japan was facing the dual pressures of deflation and a strong yen; today, the macro environment has shifted to inflation and a weak yen. Therefore, both fiscal and monetary policy in Japan need to move towards tightening.

Currently serving as Senior Fellow at the National Graduate Institute for Policy Studies, Kuroda emphasized that the Bank of Japan must gradually raise interest rates to a neutral level, while fiscal policy must also tighten synchronously. With inflation persistently above the 2% target for several years and a tight labor market pushing up wages, the Bank of Japan exited its earlier stimulative policies in 2024 and has carried out multiple rate hikes.

Warning on Expansionary Fiscal Risks and Yen Weakness

Unlike the normalization path of monetary policy, Japan's current fiscal policy still tends towards expansion. As a supporter of "Abenomics," Sanae Takaichi increased government spending and pledged to suspend the 8% sales tax on food for two years to alleviate the impact of rising living costs on households.

Kuroda expressed doubts about this. He believes it’s reasonable for the government to support innovation to improve long-term potential growth, but merely increasing spending to ease living costs may backfire, as it would further aggravate inflationary pressures and potentially push up bond yields. After winning the election on February 8, markets are closely watching whether Takaichi will continue to pursue expansionary fiscal and monetary policies. Reports indicate that she recently expressed reservations about further rate hikes to Bank of Japan Governor Kazuo Ueda, raising concerns of policy friction in the market. As a result, the yen dropped to 155.80 against the dollar on Wednesday.

Regarding the current exchange rate, Kuroda noted that considering Japan's recent economic growth, price trends, and economic competitiveness, the yen is “a bit too weak” at present. While foreign exchange intervention can influence yen movements in the short term, its effects cannot be guaranteed to last.

Supporting the Central Bank's Low-Key Communication Strategy

When discussing the central bank's market communication, Kuroda believes the current monetary policy environment no longer needs the "shock therapy" he used during his tenure. While serving as governor, his simple yet bold communication strategy aimed to convince the public that Japan could emerge from decades-long deflation.

He stated, the current goal of the Bank of Japan is to achieve policy normalization without triggering economic turmoil, so a more low-profile communication approach is needed. When the central bank is gradually moving rates toward a neutral level, there is no need to speak out excessively.

Kuroda praised current Governor Kazuo Ueda’s communication strategy. He thinks Ueda's maintaining subtle differences and some ambiguity in policy statements is the right approach, and such a low-key stance is more suitable during this transitional period for policy.

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