(Bloomberg) -- The Bank of Japan may raise interest rates by the fourth quarter under the leadership of Kazuo Ueda, according to Eisuke Sakakibara. 

Nicknamed “Mr. Yen” for his ability to influence the currency during his tenure as Japan’s vice finance minister from 1997-1999, Sakakibara said Ueda may be compelled to act between October and December as domestic inflation quickens. The yen is likely to benefit, strengthening to around the 120 per dollar level this year from around 132 now, he added. 

Ueda “may change his policy if the Japanese economy gets overheated, which is expected at this moment,” Sakakibara said in an interview with Bloomberg Television. “He might be in a position to tighten monetary policy rather than continuing to ease.” 

The nomination of Ueda, a university professor and former BOJ board member, is reinforcing bets for a shift in policy with traders boosting wagers that Japan’s interest rates will rise around July. Dubbed “Japan’s Ben Bernanke” by former Treasury Secretary Larry Summers, Ueda has been the subject of intense scrutiny since word of his appointment broke on Friday, with investors parsing his previous writings in an attempt to gain an insight into his views.

Traders have every reason to be on guard: rising yields may prompt Japanese investors to repatriate funds back home, drying up liquidity and exerting upward pressure on global borrowing costs. As it is, funds in the Asian nation have sold a record $181 billion of foreign debt and pumped ¥30.3 trillion ($230 billion) into the local government bond market, and there’s more than $2 trillion of bonds left to potentially sell.

Japan Nominates Ueda to Head BOJ Amid Pressure for Policy Shift

The yen, which has risen more than 15% from its October low, climbed as much as 0.5% to 131.79 per dollar after the official announcement on Tuesday that Ueda was nominated to succeed outgoing Governor Haruhiko Kuroda. It later pared some of that gain, falling back to 132.30 by 11:57 a.m. London time.

Japan has “definitely” exited deflation and price growth would probably be around 2% for some time to come, said Sakakibara. “They will first stop easing monetary policy and gradually move toward tightening.”

Back in December, Sakakibara had said the BOJ could tighten policy as early as January, and the yen may strengthen to 120 per dollar as the central bank backs away from its ultra-dovish settings.

--With assistance from Joanne Wong and Alice Gledhill.

(Updates yen levels.)

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