BOJ Board Member Koeda Warns Against Excessive Caution on Rate Hikes

Bank of Japan Policy Board member Junko Koeda has warned that the central bank should not take an overly cautious stance on raising interest rates, remarks suggesting that the BOJ remains determined to hike borrowing costs again in the coming months after accelerating its pace of monetary policy normalization.

"Given considerable upside risks to prices and still accommodative financial conditions, the Bank of Japan should not be too cautious about raising interest rates," Koeda said Thursday in a speech to local leaders in Kumamoto Prefecture in southwestern Japan.

After the remarks, the yen was largely steady but remained relatively firm Thursday morning, trading at 157.73 per dollar, compared with a level of 158.95 per dollar it briefly touched the previous night following the release of U.S. CPI data.

The speech indicates the BOJ is still searching for the appropriate timing for further rate increases. While her comments did not suggest an urgent need for back-to-back hikes this month, they reinforced the view that another rate increase is possible in the coming months.

"I believe the central bank should closely monitor economic and price conditions while taking into account the estimated range for the neutral interest rate and adjust the policy rate in a timely manner," she said.

The BOJ raised borrowing costs last month, its fastest pace since 1990 following a June hike. Although two members dissented at last month's meeting, disappointing some investors who had hoped for a unified signal from the nine-member board, Koeda's remarks suggest strong support for further rate increases.

People familiar with the matter said earlier this month that BOJ officials prefer not to raise rates again this month, avoiding a rare consecutive hike, but are still considering the possibility of acting again as early as December.

Overnight index swap rates show only a 6% probability of another BOJ rate hike this month, while the likelihood of a hike before December stands at 89%.

Koeda also addressed the neutral interest rate, the level of borrowing costs that neither stimulates nor restrains the economy. Although the BOJ's estimated range for that rate is 1.1% to 2.5%, Koeda said the actual level could be well above the lower end of that range as Japan's economic environment changes.

"I believe the neutral interest rate is well above 1%," Koeda said, suggesting she sees ample room to raise the policy rate from its current 1.25%.

The BOJ's next policy decision is scheduled for October 30.