Former Bank of Japan governor Kuroda backs more rate increases as services inflation reaches 3.7%

Haruhiko Kuroda, who ran the Bank of Japan's (BOJ) decade of large-scale monetary easing, now supports further rate increases by his successor, Kazuo Ueda. In a newly published book, Kuroda writes that he is sure the BOJ will consider a 25-basis-point increase at each policy meeting to bring rates closer to levels considered neutral for the economy. One of his former deputies urged caution.

The data support the case for further increases. The BOJ's services producer price index for September rose 3.7% from a year earlier, up 0.2 percentage points from August. Nikkei reports that transportation and postal services rose 8.4%, and that international cargo transport prices rose 97.7% because of the Middle East situation. Leasing and rental prices rose 11.7%. Prices in general services rose 2.8%, and staffing and building services passed through higher labor costs.

The central bank is expected to wait for now. A CNBC survey finds that all respondents expect the BOJ to hold its policy rate at 1.25% when its meeting ends on Friday, October 30, and to prepare for an increase in December or January. Most respondents expect the yen to trade between 157 and 158 per dollar over the following month.

The gap between the policy rate and price growth is wide. A 1.25% policy rate set against 3.7% services price inflation leaves Japanese real rates deeply negative. That gap helps explain the weak yen and the continued use of the yen to fund carry trades into higher-yielding assets abroad (borrowing in yen to invest elsewhere).