Bank of Japan policy board member Junko Koeda indicated support for further increases in the benchmark interest rate on Thursday, marking another significant signal that the central bank could raise rates as early as next month. Speaking to 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 appropriate for the central bank to raise the policy rate at a suitable pace to address high inflation, while balancing economic considerations."
At the previous policy meeting on April 28, Koeda voted with the majority to keep rates unchanged, resulting in a 6-3 decision—the most divided outcome since Governor Kazuo Ueda took office. While Koeda did not specify a preferred timing for the next move, her remarks are likely to reinforce market expectations for a rate hike at the next policy meeting on June 16. She is the second member from the majority camp to hint at an imminent rate increase, following Kazuyuki Masu, who earlier this month stated that "as long as the economy remains resilient, authorities should raise rates sooner rather than later."
As of Thursday morning in Tokyo, pricing in the overnight swap market showed traders assigning an approximately 80% probability to a rate hike next month. Recent economic data indicate that Japan's economy remains resilient despite shocks from global conflicts. A report from the Cabinet Office earlier this week showed first-quarter economic growth exceeded expectations. Meanwhile, the producer price index (PPI) for April recorded its largest increase since 2014, highlighting building inflationary momentum.
Koeda, an economics professor, also expressed caution in her speech, emphasizing the importance of assessing the impact of Middle East conflicts. She noted the need to gauge "the extent to which external demand will weaken and, against this backdrop, how Japan's net exports will change given the current exchange rate levels." She added that authorities must understand how elevated energy costs due to geopolitical tensions affect domestic demand. Japan is highly dependent on natural resource imports.
With geopolitical tensions unlikely to ease soon, concerns are rising 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 reversed her stance on a supplementary budget, stating she had requested the finance ministry to explore funding for a spending plan expected to consist of emergency relief measures rather than economic stimulus.
Regarding the Bank of Japan's gradual reduction of government bond purchases as part of quantitative tightening, Koeda said the central bank should proceed with balance sheet normalization "in a predictable manner while ensuring flexibility." She added that when considering the long-term balance between redemptions and purchases, the bank needs to comprehensively evaluate various factors, including conditions in the Japanese government bond market and liquidity indicators such as reserve balances.
At its June policy meeting, the Bank of Japan plans to conduct a mid-term review of its government bond purchase reduction plan. The central bank will also hold meetings on Thursday and Friday to gather opinions from market participants on the pace of balance sheet reduction.
Addressing the impact of Takaichi's fiscal policies on the recent surge in Japanese government bond yields, Koeda referenced market views. Earlier this week, the yield on 30-year Japanese government bonds rose to its highest level since the instrument's issuance in 1999, while benchmark 10-year and 20-year yields also climbed to their highest since 1996. She remarked, "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 policy rates, a question remains in investors' minds: can the Bank of Japan under Governor Ueda actually implement a rate hike? It is widely known that Prime Minister Takaichi favors monetary stimulus. However, the prime minister faces a dilemma: market expectations that she does not welcome rate hikes have contributed to yen depreciation, thereby amplifying inflationary pressures that raise living costs. The finance ministry 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 he would monitor upside risks to inflation expectations and noted that the pace at which companies pass on cost increases to customers has recently accelerated. Koeda echoed this view on Thursday, saying, "Compared to a few years ago, the speed at which companies pass on prices appears to have increased."
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