Japan Signals Openness to Gradual BOJ Rate Hikes as Deflation Era Ends

Japan’s government may not need to appoint reflation advocates to upcoming vacancies on the Bank of Japan (BOJ) board, signaling potential support for gradual interest rate hikes as the country moves beyond decades of deflation. Etsuro Honda, an economic adviser to Prime Minister Sanae Takaichi, said Japan’s economic landscape has shifted, reducing the urgency for aggressive monetary easing policies that defined the Abenomics era.

In a recent interview, Honda emphasized that Japan is no longer trapped in deflation and now faces the challenge of building a sustainable growth strategy. With inflation rising and bond yields climbing, the BOJ could have room to tighten monetary policy further in 2025. The central bank has already ended its massive stimulus program under Governor Kazuo Ueda and raised interest rates to 0.75% after determining that Japan is making steady progress toward its 2% inflation target.

Honda noted that while another rate hike this year is possible, the BOJ is unlikely to increase rates in March as policymakers assess the impact of December’s adjustment. He acknowledged that higher rates may be necessary to maintain price stability and help prevent excessive yen depreciation. A stronger economic foundation, he added, would naturally support a firmer yen.

Prime Minister Takaichi, known for backing expansionary fiscal and monetary policies, has the authority to nominate replacements for two BOJ board members whose terms expire this year. Markets are closely watching these appointments, as they could influence the pace and timing of future BOJ rate hikes and shape Japan’s broader monetary policy direction.

Sources indicate the government may submit a nominee to parliament as early as February 25 to replace board member Asahi Noguchi, with another vacancy arising in June. Parliamentary approval is required for both appointments, making the selections critical for Japan’s evolving economic policy.