Japan's central bank just raised its benchmark rate to 1% - the highest level since 1995. Kenzo Yamamoto, who led the BOJ's financial system department before leaving in 2012, argues the bank's own data shows inflation is running hotter than it admits.
The BOJ has an official inflation target of 2%. But Yamamoto points to the bank's "underlying inflation measure" - a metric that excludes fresh food and such temporary influences as government subsidies. Over the past four years, that measure has averaged around 3%.
That's a full percentage point above the target. Meanwhile, Japan's core consumer price index - which excludes fresh food only - came in at just 1.4% in May. That low number was held down by cost-of-living programs pushed by Prime Minister Sanae Takaichi.
Yamamoto says the central bank needs to shift to containing inflation. "I would be troubled if the BOJ were to say its underlying inflation gauge doesn't reflect the price trend," he said. "The BOJ needs to shift to containing inflation."
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Most economists surveyed by Bloomberg expect the BOJ to hold off on another rate hike until December. Yamamoto disagrees. "Given the current degree of monetary accommodation, the next rate hike will probably come before that," he said.
Yamamoto said the current 1% rate leaves financial conditions still excessively accommodative.
The BOJ has also announced plans to keep buying about 2 trillion yen in government bonds each month starting in fiscal 2027, after it finishes reducing its purchases. That means the central bank will still be pumping cash into the market.
By early 2030, the BOJ's bond holdings are projected to shrink by roughly 37% compared with two years earlier. But even then, Yamamoto estimates the bank will still hold around 200 trillion yen in bonds by 2035 - roughly double the amount when the BOJ started its massive easing program in April 2013.
"We don't know what the appropriate size of the BOJ's bond holdings should be, but it's clear we're still a long way from that level," Yamamoto said. "There was no need to stop tapering so early. The plan will leave financial markets awash with liquidity."
Yamamoto added: "Without a clear roadmap for completing a balance sheet normalization, the BOJ risks exposing itself to political pressure to increase bond purchases again, as the government is a proponent of accommodative policy. Another risk is that the bank may have to raise interest rates more than otherwise necessary because financial conditions will remain excessively loose."
"The BOJ's bond plan amounts to a declaration that its balance sheet will never return to its pre-ultra easy policy size," Yamamoto said. "It's the unwanted legacy of having conducted that program."
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