Japan Interest Rate

Bank of Japan Governor Kazuo Ueda told parliament Monday that underlying inflation is “quite close” to the 2% target, with strong global AI demand adding to price pressures from a tight labor market. He noted it was increasingly important to anchor inflation around 2%. While rising raw material costs from the Middle East conflict were lifting prices, Ueda added that demand-driven pressures from jobs and recovery were also at play. He further added that raising rates at an appropriate pace would help prevent spikes in bond yields, warning that failing to adjust policy could stoke concern over an inflation overshoot. Asked about fiscal spending, he replied that higher expenditure would spur wages and prices, though boosting supply capacity could moderate inflation longer term. The remarks came ahead of the central bank’s policy meeting later this month, where fresh growth and inflation forecasts will be closely watched for signals on rate-hike timing.

The Bank of Japan (BoJ) should not be overly cautious about further rate hikes given persistent upside price risks and still-accommodative financial conditions, board member Junko Koeda said in a speech. She called for timely policy adjustments based on economic and price developments, while considering the estimated range of the neutral interest rate. Koeda noted that price increases across a broad range of consumer items and a shift in the distribution of price changes suggest underlying inflation is becoming anchored around 2%. Stable wage growth also indicates that sustained inflation is taking hold more firmly in Japan. She stressed the need to deepen the BoJ’s analysis of economic conditions, prices, and financial markets as positive interest rates become a normal feature of economic activity.

Bank of Japan policymakers signalled growing support for further interest-rate hikes, with some calling for faster increases or for rates to be brought closer to the central bank’s “goal” relatively soon. The views, outlined in a summary of opinions from the September meeting, reinforced expectations of another hike as inflationary pressures persist. One policymaker said the central bank should accelerate tightening if prices show signs of exceeding its outlook, while another argued rates should move closer to the neutral level to preserve room to respond to economic shocks. Several members noted underlying inflation had reached or was nearing the 2% target, with some warning of persistent price pressures. Policymakers also highlighted upside risks from elevated crude oil prices amid Middle East tensions. The BoJ raised its policy rate to 1.25% in September, with Governor signaling a greater focus on preventing inflation from overshooting the target.