BOJ Could Deliver Two More Hikes by March, Ex-Board Member Says

A rate path of two additional hikes by March would bring the policy rate to about 0.5%. That level would still be deeply negative in real terms, given Japan's core inflation of roughly 2.8%. Even a modest increase to 0.5% would shift the calculus for global carry trades that have borrowed in yen to fund purchases of higher-yielding currencies.

Leverage in yen-funded carry trades has drawn attention from regulators. The Bank for International Settlements last month flagged the buildup of short yen positions as a vulnerability in global markets. A surprise BOJ move could trigger an unwind, pressuring the yen higher and causing volatility in emerging-market currencies and U.S. Treasuries.

The BOJ also faces fiscal constraints. Japan's government debt exceeds 250% of GDP. A faster pace of rate hikes would steepen the yield curve, raising interest-service costs for a government already running primary deficits.

Sakurai acknowledged the risk. He said the BOJ's primary mandate – price stability – is now the binding constraint. "Inflation is above target, and that is the board's focus," he said.

The next key data point before the June meeting is the national core CPI print for April, due May 24, along with Tokyo-area CPI for May in late May. A pair of upside surprises would harden expectations of a July move, traders said.

The BOJ's updated quarterly outlook, released at the April meeting, expects core inflation to average 2.8% in the current fiscal year, with risks tilted to the upside. Sakurai said the board may revise those forecasts higher in July, setting the table for a rate increase.