Bank of Japan (BOJ) Policy Board Member Junko Koeda indicated on Thursday her support for further increases in the benchmark interest rate, marking another significant signal that the central bank could raise rates as early as next month. Speaking to local business leaders in Fukuoka, western Japan, Koeda stated, "I believe there is a possibility that underlying inflation will exceed 2% in the future. Therefore, I consider it reasonable for the Bank to raise the policy rate at an appropriate pace, balancing the response to high inflation against economic considerations."
At the previous policy meeting on April 28, Koeda voted with the majority to maintain the current interest rate, resulting in a 6-3 decision, the most divided outcome since Governor Kazuo Ueda assumed leadership. While Koeda did not explicitly state a preference for the timing of the next move, her remarks are likely to further strengthen market expectations for a rate hike at the next policy meeting on June 16.
She is the second member from the majority faction to hint at an imminent rate hike, following board member Kazuyuki Masu, who earlier this month stated that "authorities should raise rates as early as possible, provided the economy remains resilient."
As of Thursday morning in Tokyo, pricing in the overnight swap market indicated that traders assign approximately an 80% probability to a rate hike next month.
Recent economic data show that the Japanese economy remains resilient despite the impact of the US-Iran conflict. A report released earlier this week by the Cabinet Office indicated that first-quarter economic growth exceeded expectations. Meanwhile, the Producer Price Index (PPI) for April recorded its largest increase since 2014, highlighting that inflationary momentum is building.
Koeda, a former economics professor, also expressed a degree of caution in her speech, emphasizing the importance of assessing the impact of the Middle East conflict.
She noted the need to gauge "to what extent external demand will weaken and, against this backdrop, how Japan's net exports will change, considering the current exchange rate levels." She also pointed out that authorities need to understand how elevated energy costs, driven by geopolitical instability, are affecting domestic demand.
Japan is highly dependent on natural resource imports. As geopolitical tensions are unlikely to subside in the short term, market concerns are growing that energy shortages and high prices could trigger broader inflation, while risks of an economic slowdown are also emerging.
This week, Prime Minister Sanae Takaichi performed an about-face on the supplementary budget issue, stating she had instructed the Ministry of Finance to study funding for a spending plan expected to consist of emergency relief measures rather than economic stimulus measures.
Regarding the BOJ's gradual reduction of government bond purchases as part of quantitative tightening, Koeda stated that the Bank should proceed with balance sheet normalization steadily, "in a predictable manner while ensuring flexibility."
She added that when considering the long-term balance between redemptions and purchases, the central bank needs to comprehensively assess various factors, including conditions in the Japanese government bond market and liquidity indicators such as reserve balances.
At the June policy meeting, the BOJ plans a mid-term review of its government bond purchase reduction plan. The Bank will also hold meetings on Thursday and Friday to gather opinions from market participants on the pace of balance sheet reduction.
When discussing the impact of Takaichi's fiscal policy on the recent surge in Japanese government bond yields, Koeda referenced market views. Earlier this week, the yield on Japan's 30-year government bonds rose to its highest level since the issuance of that maturity in 1999, while benchmark 10-year and 20-year bond yields also climbed to their highest levels since 1996.
She stated, "The government is Japan's largest borrower, so I believe the future of government financing is a key issue to consider against the backdrop of changes in Japan's demographic structure and macroeconomic savings balance."
Regarding the policy rate, a question remains in investors' minds: can the BOJ under Governor Ueda's leadership actually implement a rate hike? It is well known that Prime Minister Takaichi favors monetary stimulus.
However, the Prime Minister faces a dilemma: market perceptions that she is unwelcoming of rate hikes have, in turn, contributed to yen depreciation, thereby amplifying inflationary pressures that are driving up the cost of living. The Ministry of Finance has intervened to support the yen, but the currency has given back some of its post-intervention gains.
In remarks following this week's G7 meeting, Governor Ueda stated that the Bank would monitor upside risks to inflation expectations and noted that the speed at which companies are passing on cost increases to customers has recently accelerated.
Koeda echoed this view on Thursday, stating, "Compared to a few years ago, the speed of price pass-through by companies appears to have accelerated."
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