(Bloomberg) — The veteran head of markets at one of Japan’s largest banks sees the potential for the central bank to raise benchmark interest rates to a three-decade high of 2% if economic trends persist.
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The Bank of Japan is likely to increase the policy rate to 1% this year from the current 0.5% as long as the US economy doesn’t falter, said Masamichi Koike, head of global markets business at Sumitomo Mitsui Financial Group Inc. Beyond that, “I don’t know if it’s in 2026 or 27, but if a time comes where there’s a need to cool the economy or inflation then I think it would have to rise to 2%.”
In turn, benchmark 10-year Japanese government bond yields are likely to keep climbing, exceeding 2%, Koike said in an interview. As a result, his bank is holding off on adding large quantities of the notes to its ¥40 trillion ($270 billion) securities portfolio.
“Japan is in a rate-hike cycle,” he said. “If we make a rash move on building up the portfolio now, we could run the risk of bigger valuation losses in the future.”
Traders are closely watching for signs that Japan’s financial institutions will resume buying the nation’s debt now that the central bank has started raising rates and paring its bond holdings.
Koike, 61, has been prescient about rising borrowing costs in Japan in the past, predicting in September 2023 that sticky inflation would drive short- and long-term rates up from rock-bottom levels. The BOJ scrapped its long-standing negative-rate policy six months later, and 10-year bond yields last week breached 1.5% for the first time in 16 years.
Koike’s prediction for the BOJ to potentially raise rates to 2% — a level unseen since 1993 — is more hawkish than the consensus. Economists surveyed by Bloomberg anticipate the terminal rate to be 1.25%.
According to Koike, Japan’s inflation will stay above 2%, driven by higher import costs stemming from ructions in global trade. But he doesn’t anticipate major adverse effects from rate hikes, stressing that Governor Kazuo Ueda and his policy board will increase borrowing costs in line with the state of the economy’s health.
“The BOJ will raise rates very carefully to nurture budding inflation,” said Koike, who will become deputy chairman of Japan’s second-largest banking group on April 1. “Economic conditions are improving with a virtuous cycle of wage hikes and inflation. But they’re not so solid that they need cooling down.”
