BoJ Koeda Backs Further Rate Hikes Amid Inflation Risks

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.

It was appropriate for the Bank of Japan to continue raising policy interest rates and gradually adjust monetary accommodation, July minutes showed, as underlying CPI inflation neared 2% and financial conditions stayed accommodative. Members stressed preemptive action against upside risks to avoid rapid hikes later, noting the rate remains below the neutral range. One member observed markets expect hikes every six months, but warned the pace could be faster if inflation risks intensify. The timing of adjustments should weigh baseline outlooks, risks from Middle East tensions, AI demand, and FX moves. Policymakers emphasised a shift from lifting inflation to anchoring it at 2%, warning that unchecked upside risks could harm the economy and compel sharper moves. One cautioned that delayed tightening could force double shocks, underscoring the need for nimble policy.