Former Bank of Japan Official: Interest Rates Could Rise in March Over Currency Concerns

A former Bank of Japan board member suggests the central bank might increase interest rates as early as March if Japan's currency continues weakening before a planned U.S.-Japan summit. The potential rate hike would be aimed at preventing further decline of the yen against the dollar.

Japan’s central bank could move to increase interest rates as soon as next month if the nation’s currency continues its downward trend before an anticipated meeting between Japanese and American leaders, according to a former monetary policy official.

Makoto Sakurai, who previously served on the Bank of Japan’s board, told Reuters that the timing could coincide with Prime Minister Sanae Takaichi’s expected trip to Washington to meet with President Donald Trump around the central bank’s upcoming policy session scheduled for March 18-19.

According to Sakurai, Takaichi might request assistance from the Bank of Japan to prevent further currency depreciation, especially since Washington’s recent actions to support the yen suggest American officials prefer a stronger Japanese currency relative to the dollar.

“Currency intervention has only a temporary effect in combating yen-selling pressure. The best way to counter a weak yen is for the BOJ to raise interest rates,” Sakurai explained during a Friday interview, noting he maintains connections with current policymakers.

The former official explained that additional currency weakness would drive up inflation through increased import expenses, which would counteract some downward price pressure from government fuel subsidies.

Should the need arise to address significant currency declines, the Bank of Japan could justify a March rate increase by highlighting expectations for robust wage increases in the country’s annual spring labor negotiations, Sakurai noted.

“It would make better sense to wait until April but depending on yen moves, there’s a chance the BOJ could raise rates in March,” he stated.

Sakurai held his position on the central bank’s board from 2016 through 2021, during a period when the institution transitioned from massive asset purchasing programs toward managing long-term rates through bond yield controls.

Looking ahead, he suggested the Bank of Japan might need to implement two rate increases each in 2026 and 2027 to bring its benchmark rate from the current 0.75% to 1.75%, which he believes represents a neutral level that neither restricts nor stimulates economic growth.

Moving too quickly with rate increases could damage Japan’s banking sector by causing more small business failures and weakening regional bank balance sheets, Sakurai cautioned.

The central bank concluded its decade-long massive stimulus program in 2024 and has implemented several rate increases, including a December move that brought the short-term policy rate to 0.75%, its highest level in three decades.

With inflation running above the Bank of Japan’s 2% goal for almost four years, Governor Kazuo Ueda has indicated the institution’s willingness to continue raising rates if economic conditions develop as projected.

Most economists surveyed by Reuters anticipate the Bank of Japan will increase rates to 1% by the end of June, while financial markets indicate approximately 70% odds of a rate hike by April.

The central bank’s next policy meeting is set for March 18-19, followed by an April 27-28 session that will include updated quarterly economic growth and inflation projections.

Currency weakness has created political challenges for Japanese officials as it increases costs for households and businesses by making imported fuel and food more expensive.

Since Takaichi, known for favoring loose fiscal and monetary policies, assumed the prime minister role in October, the yen has declined roughly 8% against the dollar, reaching an 18-month low of 159.45 in January.

While the currency has recovered somewhat from those lows, it currently trades around 155 per dollar, significantly weaker than the 147 level seen before Takaichi took office.