Former Bank of Japan Governor Haruhiko Kuroda Calls for Rate Hikes and Tightening Fiscal Policy

On February 25, former Bank of Japan Governor Haruhiko Kuroda stated that as Japan’s economic conditions significantly improve, the Bank of Japan must continue to raise interest rates, and the government should also tighten fiscal policy.

According to Reuters, Kuroda expects the BOJ to raise rates about twice a year in 2026 and 2027, gradually moving the current policy rate toward a neutral level for the economy.

He warned that Prime Minister Sanae Takaichi’s large-scale spending and tax cuts could backfire, further increasing inflation pressures. Previously, there were reports that Takaichi was cautious about further rate hikes, which has already pressured the yen lower.

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

Calling for Both Monetary and Fiscal Tightening

In an interview with Reuters, Kuroda pointed out that Japan’s economy is currently in a “good state,” achieving steady growth and gradually increasing wages. Against this backdrop, the BOJ has room to gradually raise the current 0.75% policy rate to around 1.5% to 1.75% over the next few years.

He recalled that during the early implementation of “Abenomics,” Japan faced deflation and a strong yen; now, the macro environment has shifted to inflation and a weakening yen. Therefore, both fiscal and monetary policies need to move toward tightening.

Currently, Kuroda, who is a senior researcher at the National Graduate Institute for Policy Studies, emphasized that the BOJ must gradually raise interest rates to a neutral level, and fiscal policy must tighten in tandem. With inflation remaining above 2% for years and a tight labor market pushing wages higher, the BOJ exited its previous stimulus in 2024 and has implemented multiple rate hikes.

Warning of Expansionary Fiscal Risks and Yen Weakness

Unlike the normalization path of monetary policy, Japan’s current fiscal policy remains expansionary. As a supporter of “Abenomics,” Takaichi increased government spending and promised to suspend the 8% sales tax on food for two years to ease the rising cost of living for households.

Kuroda expressed skepticism about this. He believes that supporting innovation to boost long-term potential growth is reasonable, but increasing spending solely to ease living costs could be counterproductive, as it would further exacerbate inflation pressures and potentially raise bond yields. After her election victory on February 8, markets closely watched whether Takaichi would continue to push for loose fiscal and monetary policies. Recently, she reportedly expressed reservations about further rate hikes to BOJ Governor Ueda Kazuo, sparking concerns about policy friction. As a result, the yen fell to 155.80 against the dollar on Wednesday.

Regarding the current exchange rate level, Kuroda noted that based on Japan’s recent economic growth, price trends, and competitiveness, the yen’s recent level may be “slightly too weak.” While foreign exchange interventions can influence the yen in the short term, they cannot guarantee long-lasting effects.

Supporting a Low-Key Communication Strategy for the BOJ

On the topic of central bank communication, Kuroda believes that the current monetary policy environment no longer requires the “shock therapy” he employed during his tenure. His straightforward and bold communication strategy aimed to convince the public that Japan could emerge from decades of deflation.

He stated that the BOJ’s current goal is to normalize policy without causing economic turmoil, thus requiring a more subdued communication approach. When rates are gradually moving toward neutral, there is no need for excessive commentary.

Kuroda approved of the current Governor Ueda Kazuo’s communication strategy. He believes that maintaining subtle differences and some ambiguity in policy statements is the right approach, and this low-key stance is more appropriate during the current transitional period.

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