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The Bank of Japan is being urged to raise Interest rates to at least 1% in the second half of the next fiscal year, according to Naoki Tamura, a hawkish policymaker. This move is seen as necessary to support the Central bank‘s commitment to steady monetary tightening.

Tamura’s comments mark the first time a BOJ policymaker has specified a target level for short-term borrowing costs. He believes that with the improving likelihood of Japan’s economy sustainably reaching the 2% Inflation target, the conditions are ripe for additional rate hikes.

The neutral interest rate in Japan is estimated to be at least around 1%, according to Tamura. Therefore, he argues that raising the short-term policy rate to around 1% is essential to achieve the BOJ’s price goal in a sustainable manner.

Tamura suggested that the BOJ should aim to raise rates gradually so that they reach around 1% by the latter half of the current three-year growth and Inflation forecast period, which ends in March 2027. This would imply rates hitting 1% around October 2025 at the earliest.

The Central bank is expected to leave rates unchanged at its upcoming meeting in September, but there is growing speculation among economists that further tightening may occur by the end of the year.

Tamura’s remarks come amidst calls from other BOJ board members to continue raising borrowing costs despite recent market volatility. Governor Kazuo Ueda has indicated a readiness to raise rates further if Inflation remains around 2% and is accompanied by solid wage growth, as projected by the bank.

In his speech, Tamura expressed concerns about rising Inflation risks, particularly as increasing labour shortages push firms to raise wages and pass on higher costs through price hikes. He emphasized the importance of raising Interest rates at the right time and in a gradual manner.

Core consumer Inflation in Japan reached 2.7% in July and has surpassed the 2% target for 28 consecutive months. The neutral interest rate, which is crucial for setting monetary policy, is estimated by policymakers using economic models.

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