Interest rate hike window in April? Former chief economist of the Bank of Japan speaks out: Failure to raise interest rates may lead to a "destructive selloff" of the yen.

Former chief economist of the Bank of Japan said that the Iran war is raising the upside risks for inflation, providing strong support for the Bank of Japan to raise interest rates as early as this month. Former chief economist Toshitaka Sekine said in an interview on Wednesday, "If the intention is to assess the situation, I think taking action in April is feasible," "By the end of April, we will at least know whether the negative impact of the Middle East situation is only temporary." Although experts are still debating whether geopolitical shocks will trigger inflation or deflation for a resource-poor country like Japan, Sekine's comments indicate that when the Bank of Japan sets policy on April 28, there is likely to be a firmer confidence in the necessity of raising interest rates. Sekine worked at the Bank of Japan for more than 30 years until 2020. He speculated that Bank of Japan officials may share his views, as the summary of the March policy meeting clearly showed that committee members are increasingly concerned about the risk of inflation. Sekine said that facing pressure from four consecutive years of price increases above the Bank of Japan's 2% target, the supply shock triggered by the Iran conflict will further increase inflation. The Cabinet Office has estimated that for every 10% increase in oil prices, the inflation rate could rise by as much as 0.3 percentage points. Since the outbreak of the war, oil prices have risen by about 50%. "Unlike when I was at the Bank of Japan, since 2022, we have actually experienced inflation above target," Sekine said. "Given this, if another supply shock could lead to the risk of prices facing inflation again, I would lean towards raising interest rates." Traders believe that the possibility of raising interest rates at the committee meeting this month is about 70%. However, many Bank of Japan watchers point out that the final decision will depend on the evolution of the Middle East situation, as Governor Haruhiko Kuroda has promised to monitor both upside and downside risks to inflation simultaneously. "My view is that the upside risks are greater," Sekine said. He added that Prime Minister Sanae Takaichi has already increased spending to control living costs and is likely to introduce follow-up measures. He said this could in turn create inflationary pressure from the fiscal side. Takaichi has signaled a preference for a gradual approach to raising interest rates. Now, it is crucial to observe whether the Prime Minister will try to prevent borrowing costs from rising when the economic outlook is uncertain. However, Sekine pointed out that if the Bank of Japan is unable to fulfill its mandate of stabilizing inflation due to political reasons, the cost could be significant, as financial markets may react strongly. "If this happens, there could be a situation where foreign investors sell a large amount of yen, leading to further depreciation of the yen," Sekine said. "Combined with higher oil prices, this could create uncomfortable levels of upward pressure on inflation." Sekine currently serves as an economics professor at Hitotsubashi University. He believes that Governor Kuroda, who comes from an academic background, has already successfully scaled back the massive monetary easing policy and will take the necessary actions he deems fit, even in the face of market skepticism. "This is a moment of truth for Governor Kuroda, even though he may not welcome it," Sekine said. "History has shown that central banks, if they fail to act in a timely manner, may have serious consequences, and Governor Kuroda is well aware of this."