The Bank of Japan may not be finished tightening policy. A hawkish remark from a BOJ board member has drawn fresh market attention, suggesting further rate hikes remain on the table.
During Asian trading hours on Thursday (October 15), the U.S. dollar fell as much as 0.45% against the yen to around 157.58, touching a one-week low, before trading near 157.87.
BOJ Policy Board member Junko Koeda said in a speech to local business leaders in Kumamoto on Thursday that, given significant upside risks to prices and still-loose financial conditions, the Bank of Japan should not be overly cautious about raising interest rates. She noted that the neutral rate is likely far above 1%, while the current policy rate is only about 1.25%, implying that additional hikes are still under consideration. That hawkish stance provided some support for the yen and could push Japanese government bond yields higher.
Neutral Rate Far Above the Current Policy Rate
Koeda said the BOJ should adjust its policy rate in a timely manner while referring to estimated ranges for the neutral rate, the level that neither stimulates nor restrains the economy. She believes the neutral rate is very likely "far above 1%," with 1% roughly the lower bound of that estimated range. One estimate based on the potential growth rate suggests the neutral rate could exceed 2%. The BOJ's own estimates imply a nominal neutral rate of roughly 1.1% to 2.5%. After the BOJ's September rate hike, the overnight call rate now stands at about 1.25%. By Koeda's logic, that means there is still room for further increases. She stressed that 1.25% is not the endpoint and that the BOJ should not let caution slow its progress toward the neutral rate.
Underlying Inflation Trending Toward 2%, With Notable Upside Risks
Koeda pointed out that Japan's underlying inflation appears to be anchoring around the 2% target, in line with the BOJ's price stability goal. Specific signs include more than 70% of the over 500 items in the consumer price index rising year on year, an overall upward shift in the distribution of price changes, and steady wage growth, making persistent inflation more firmly entrenched than before. She particularly highlighted several sources of upside price risks. The first is geopolitical shocks, including developments in the Middle East since this spring, which have repeatedly pushed up crude oil and commodity prices. The second is the weakening of the yen's safe-haven status. During the earlier escalation in the Middle East, the yen continued to weaken rather than strengthen, as surging oil prices raised import costs. In addition, strong growth in artificial intelligence-related demand has added further upward pressure on inflation.
Economy Broadly Solid, Balance Sheet Normalization Cannot Be Ignored
Koeda's assessment of the Japanese economy was broadly positive: corporate profits are high, capital investment is growing moderately, and wages continue to rise. She said higher interest rates are not expected to significantly dampen household consumption, and corporate financing conditions remain favorable. She also stressed that continued progress in balance sheet normalization is essential, and that the BOJ's large balance sheet should not be underestimated. The BOJ is reducing its monthly government bond purchases in stages and plans to keep monthly purchases at around 2 trillion yen from April 2027.
Market Impact: Hawkish Signals Support the Yen, Bond Yields May Face Upward Pressure
Koeda's remarks were broadly hawkish. By placing the neutral rate above the current 1.25% policy rate and warning against excessive caution, she signaled that further rate hikes remain on the table. That should provide some support for the yen, especially against the backdrop of rising expectations for Federal Reserve rate hikes and narrowing interest rate differentials. Her observation that the yen has partly lost its safe-haven role is especially important for foreign exchange traders, meaning geopolitical shocks could hurt the yen by raising oil import costs rather than lifting it. If markets price in a faster path toward the neutral rate, Japanese government bond yields could face upward pressure.
Narrowing Rate Differential Expectations Weigh on USD/JPY
From the perspective of interest rate differentials, the direction of USD/JPY depends largely on the rate gap between the United States and Japan. By placing the neutral rate above the current 1.25% policy rate and explicitly warning against excessive caution, Koeda fueled market expectations for further BOJ rate hikes. At the same time, expectations for Fed rate hikes have also risen recently, but the simultaneous strengthening of BOJ hike expectations means the room for USD/JPY to weaken on rate differentials is being compressed, and the yen is no longer under one-sided pressure from a widening U.S.-Japan rate gap. More notably, Koeda pointed out that the yen has partly lost its safe-haven currency role. In past geopolitical crises, the yen usually strengthened on safe-haven buying, but during the earlier Middle East escalation, it instead kept weakening because surging oil prices raised Japan's import costs. That shift is significant for USD/JPY traders: if another geopolitical shock occurs, the yen could come under pressure from worsening terms of trade rather than receive safe-haven support, potentially giving USD/JPY upward momentum. Overall, Koeda's remarks are negative for USD/JPY in the near term, but the weakening of the yen's safe-haven attributes also provides potential underlying support for the currency pair, and future moves will still depend on the specific evolution of U.S. and Japanese central bank policy paths and geopolitical risks.
Conclusion
The core message from Junko Koeda is clear: 1.25% is not the endpoint, and the BOJ should not let caution slow the pace of rate hikes. In her view, underlying inflation is trending toward 2%, upside price risks are significant, the economy is broadly solid, and the neutral rate is far above the current level, so further rate hikes are both reasonable and necessary. Her hawkish comments provide short-term support for the yen and could push Japanese government bond yields higher, while also reminding markets that the BOJ's policy normalization process is far from over.
(USD/JPY daily chart)
At 13:50 Beijing time, USD/JPY was at 157.87/88.
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