Former BOJ Official: Financial Conditions Too Loose, Another Rate Hike Likely Before December
0xBroomberg
Former BOJ executive board member Kenzo Yamamoto warns monetary conditions are too loose and the next rate hike may come earlier than the consensus December timeline — signaling Japan's normalization could outpace what markets have priced in.
Why does Yamamoto call conditions "too loose"?
Over the past four years, core inflation — stripping out fresh food and government subsidies — has averaged about 3%, well above the BOJ's 2% target.
This means → even with the benchmark rate now at 1% (highest since 1995), the real rate is still negative. Monetary conditions have not actually tightened.
In plain terms = prices rose 3%, but the rate is only 1%. Money sitting in the bank is still losing value — the BOJ's hikes have not caught up with inflation.
Why do official numbers suggest inflation is low?
May core CPI (excluding fresh food) came in at just 1.4%, far below the 3% average.
This reflects the impact of cost-of-living relief measures introduced by Prime Minister Sanae Takaichi.
The BOJ itself recently noted that the price-rise trend remains "slightly below 2%."
In plain terms = the two data sets are answering different questions — one tracks the long-term trend, the other captures the short-term effect of policy intervention. Yamamoto reads the former; the BOJ officially cites the latter.
How do major banks see the rate path?
Goldman Sachs expects roughly one hike every six months.
MUFG expects one more hike later this year.
Barclays is the most aggressive: a 25 bp hike in October and another in April 2027, with a terminal rate of 1.5%.
This means → direction is unanimous — everyone expects more hikes. The disagreement is only about pace and endpoint.
What are markets and the BOJ itself signaling?
As of early June, markets priced the probability of another hike at the October meeting at roughly 50%.
June meeting minutes show most board members flagged upside inflation risk from supply shocks such as oil, favoring continued gradual tightening.
Hawkish board member Naoki Tamura said publicly on June 25 that the baseline path is a 25 bp hike every few months, targeting a 2% neutral rate.
In plain terms = the hawk faction inside the BOJ is already pushing a faster-hike agenda — it just has not secured a consensus yet.
Why does Yamamoto criticize the bond-purchase plan?
In June, the BOJ decided to stop reducing its monthly bond purchases from fiscal year 2027, holding steady at about ¥2 trillion per month.
Yamamoto called the halt premature — the plan will keep market liquidity ample.
He estimates BOJ government-bond holdings will still stand at roughly ¥200 trillion by 2035, about twice the level when large-scale easing began in April 2013.
This means → rates are going up, but the balance sheet is not shrinking in step — one foot on the brake, the other still on the accelerator.
Where is the real risk?
Yamamoto warns that without a clear balance-sheet normalization roadmap, the BOJ could face political pressure to resume expanding bond purchases.
A second risk: if financial conditions stay too loose for too long, the BOJ may ultimately have to raise rates higher than necessary.
Deputy Governor Shinichi Uchida said on June 16 that discussing the right size of the balance sheet is "still premature" — a clear split with Yamamoto's position.
This reflects a deeper unresolved question inside the BOJ: should rates or the balance sheet be normalized first?
Content is for reference only, not financial advice.