Bank of Japan Governor Reiterates Inflation Overshoot Risk and Signals Future Rate Hikes

Bank of Japan Governor Kazuo Ueda reiterated on Wednesday that the central bank sees a risk of inflation exceeding its 2% target and will raise interest rates again at an appropriate time.

In a speech read by Deputy Governor Ryozo Himino, Ueda stated: "Given that underlying inflation is approaching 2% and financial conditions remain accommodative, we anticipate continuing to raise interest rates and will adjust the degree of monetary easing based on economic activity, prices, and financial conditions."

Ueda, who had been hospitalized for a liver cyst infection and only returned to work on Tuesday, indicated that the timing and pace of these adjustments would depend on factors including the impact of the war in Iran.

These remarks align with the message conveyed at the central bank's policy meeting last week, which Ueda did not attend. At that meeting, policymakers voted 7-1 to raise the benchmark interest rate to 1%, its highest level since 1995.

A summary of opinions from the June 15-16 meeting, released this Wednesday, showed the Bank of Japan clearly signaled the necessity for further benchmark rate increases.

Economists now project the terminal rate in this hiking cycle to reach 1.75%, higher than the 1.5% forecast in a survey earlier this month.

Data shows Japan's core inflation rate held steady at 1.4% in May, matching expectations. While government support measures have somewhat shielded households from price increases, businesses are facing greater cost pressures.

Japan's producer price index rose 6.3% in May, marking the fastest increase in over three years, primarily driven by higher energy costs.

The Bank of Japan's rate hike last week was widely anticipated by markets, providing only limited support for the yen. The Japanese currency currently hovers near its weakest level against the U.S. dollar in nearly four decades.

Growing market expectations for a Federal Reserve rate hike this year are also putting pressure on the yen. At the time of writing, the yen traded at 161.70 per dollar, with traders remaining vigilant for potential intervention by Japanese authorities.