BOJ to raise rates again most likely in January, says ex-policymaker

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) - The Bank of Japan is likely to raise interest rates in coming months with January emerging as the most likely timing, when there will be more clarity on political and market developments, former BOJ board member Makoto Sakurai said on Tuesday.

The central bank will eventually aim to raise short-term borrowing costs - currently at 0.25% - to 1.5% or 2% by the end of Governor Kazuo Ueda's term in April 2028, he said.

"The BOJ probably wants to hike rates once more by March next year. The exact timing will depend much on market and political developments," Sakurai told Reuters in an interview.

"With domestic politics still in flux, acting in December might be tricky. January seems to be more likely as the BOJ would have more data including on whether consumption and wage growth will hold up," said Sakurai, who retains close contact with incumbent policymakers.

But the chance of a December rate hike would heighten if the yen resumes its decline towards the three-decade trough near 162 to the dollar hit in July, Sakurai said. The dollar stood at 152.45 yen on Tuesday.

"Governor Ueda emphasised his resolve to keep raising rates at last week's news conference, which seems to reflect the BOJ's desire to avoid triggering excessive yen falls," Sakurai said.

The dollar fell below 152 yen on Thursday when the BOJ kept rates steady, but signaled the chance of near-term action by dropping language that it can "afford to spend time" scrutinising the fallout from U.S.-related downside risks.

The BOJ next meets for a policy meeting on Dec. 18-19, followed by another meeting on Jan. 23-24.

The BOJ made a landmark exit from a decade-long stimulus programme in March and raised its short-term policy target to 0.25% in July on the view Japan was making progress towards sustainably hitting its 2% inflation target.

Ueda has stressed the BOJ's readiness to keep raising rates if the economy and prices move in line with its forecast.

While most analysts expect the BOJ to hike again by the March end of the current fiscal year, they are split on whether the bank would act in December - or wait until January or March.

The loss of a majority by Japan's ruling coalition in an election on Oct. 27 has heightened concerns about policy paralysis with Prime Minister Shigeru Ishiba being forced to court opposition parties to stay in power.

The political uncertainty, coupled with potential market turbulence after the U.S. presidential election, could prod the BOJ to stand pat in December, Sakurai said.

Another key factor for the BOJ is whether wage hikes would broaden to smaller firms and underpin consumption, he added.

After hiking rates again by March next year, the BOJ will probably aim to raise short-term rates once or twice a year from fiscal 2025 to 2027, to bring it to 1.5% or 2%, Sakurai said.

"There's too much uncertainty to predict the exact pace of further rate hikes. But the BOJ is probably hoping to hike rates to around 2% in the long-term horizon," he added.

Japan's expected huge debt issuance and political calls for bigger fiscal spending, however, could constrain the BOJ's plan to taper its bond purchases, Sakurai said.

The BOJ announced in July a plan to halve its monthly JGB buying to 3 trillion yen ($19.7 billion) as of January-March 2026, which would reduce its huge balance sheet by up to 8%.

The central bank will conduct a review of its existing quantitative tightening (QT) programme in June next year, to come up with a tapering plan from April 2026 onward.

While the BOJ may prefer to further reduce its bond buying, it may find it hard to do so given expected increases in debt issuance to pay for roll-overs of maturing bonds and additional spending plans, Sakurai said.

"The BOJ may be forced to keep buying roughly 3 trillion yen worth of bonds well beyond fiscal 2026," he said.

($1 = 152.3900 yen)

(Reporting by Leika Kihara and Takahiko Wada; Editing by Kim Coghill)