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(Bloomberg) -- The veteran head of markets at one of Japan’s largest banks sees the potential for the central bank to raise benchmark interest rates to a three-decade high of 2% if economic trends persist.

The Bank of Japan is likely to increase the policy rate to 1% this year from the current 0.5% as long as the US economy doesn’t falter, said Masamichi Koike, head of global markets business at Sumitomo Mitsui Financial Group Inc. Beyond that, “I don’t know if it’s in 2026 or 27, but if a time comes where there’s a need to cool the economy or inflation then I think it would have to rise to 2%.”

In turn, benchmark 10-year Japanese government bond yields are likely to keep climbing, exceeding 2%, Koike said in an interview. As a result, his bank is holding off on adding large quantities of the notes to its ¥40 trillion ($270 billion) securities portfolio.

“Japan is in a rate-hike cycle,” he said. “If we make a rash move on building up the portfolio now, we could run the risk of bigger valuation losses in the future.”

Traders are closely watching for signs that Japan’s financial institutions will resume buying the nation’s debt now that the central bank has started raising rates and paring its bond holdings.

Koike, 61, has been prescient about rising borrowing costs in Japan in the past, predicting in September 2023 that sticky inflation would drive short- and long-term rates up from rock-bottom levels. The BOJ scrapped its long-standing negative-rate policy six months later, and 10-year bond yields last week breached 1.5% for the first time in 16 years.

Koike’s prediction for the BOJ to potentially raise rates to 2% — a level unseen since 1993 — is more hawkish than the consensus. Economists surveyed by Bloomberg anticipate the terminal rate to be 1.25%.

According to Koike, Japan’s inflation will stay above 2%, driven by higher import costs stemming from ructions in global trade. But he doesn’t anticipate major adverse effects from rate hikes, stressing that Governor Kazuo Ueda and his policy board will increase borrowing costs in line with the state of the economy’s health.

“The BOJ will raise rates very carefully to nurture budding inflation,” said Koike, who will become deputy chairman of Japan’s second-largest banking group on April 1. “Economic conditions are improving with a virtuous cycle of wage hikes and inflation. But they’re not so solid that they need cooling down.”

Koike started his career in markets in 1989 as a currency dealer at a predecessor to Sumitomo Mitsui, right before the bursting of Japan’s asset bubble led to decades of deflation and economic stagnation. But he says those days are over, and the bank is already shifting away from its bond-heavy investment strategies that worked at the time.

“We are entering the era of inflation — it’s time for us to change our portfolio from the last 30 years,” he said.

Koike is also keeping a cautious stance on buying Treasuries and other foreign bonds. He doesn’t foresee any rate cuts by the Federal Reserve this year, because he expects the US economy will remain healthy.

Instead, Sumitomo Mitsui is buying index funds of Japanese and overseas stocks, partly as a hedge against inflation, he said. The bank is also allocating some of its money to alternative funds, he said.

Purchasing equities for investment is different from strategic shareholdings in corporate clients, which aren’t managed by Koike’s department. Like other Japanese lenders, Sumitomo Mitsui has been trimming such stakes to improve corporate governance.

The most important factor in navigating the market this year is Donald Trump’s economic and diplomatic actions, said Koike. But he doesn’t think the US president’s moves are as haphazard as they may appear, and instead are calculated to produce Trump’s desired results. The leader’s stance on Ukraine, for example, has spurred European allies into action, Koike said.

For Koike, foreseeing and preparing for global events is a lesson learned from investors he met when he worked in New York in the 1990s. As a young dealer, he tried to find out how hedge funds were making money and concluded it wasn’t that esoteric.

The banker said he tells younger members in his team, “just spend 10 minutes every day reading the news on the train to the office” and try to figure out what will happen. “If you do that every day, you’ll be able to see various things.”

--With assistance from Masaki Kondo.

(Updates with Bloomberg survey of economists in seventh paragraph)