A Bank of Japan policy board member has called for interest rate hikes as soon as feasible if no economic risks materialize, highlighting that inflation risks stemming from the situation in Iran may be more persistent. BOJ board member Kazuyuki Masu stated at a local business conference in Kagoshima, western Japan, on Thursday, "If economic data do not clearly indicate a downturn, I believe we should raise rates at the earliest possible juncture." These remarks send a strong signal that the BOJ could resume raising rates as early as its next meeting in June, aligning with growing market expectations. In April, when the central bank held rates steady, three board members already supported a hike, marking the largest dissent under Governor Kazuo Ueda's leadership; Masu's latest comments further bolster the case for tightening. Following Masu's speech, the Japanese yen surged, though it later pared some gains. As of the latest update, the USD/JPY exchange rate stood at 157.85. Earlier on Thursday, the yen had briefly fallen to its lowest level since April 30—the day Japanese authorities conducted their first foreign exchange market intervention of 2024. Neil Jones, Managing Director of FX Sales and Trading at TJM Europe, commented, "Masu's shift from a mild hawk to a hard hawk carries far more significance than the day-to-day fluctuations in the yen." Masu, a former senior executive at major Japanese trading house Mitsubishi Corporation, noted that while the Middle East conflict's push on oil prices might be temporary, it risks exacerbating Japan's "already elevated" distribution costs. He emphasized, "The market is concerned these factors may not be short-term shocks but could become longer-term trends that push up prices." He further stated that the BOJ needs to raise interest rates toward a level considered neutral for the economy—estimated to be between 1.1% and 2.5%—to be able to respond swiftly to any surge in inflation. Back in February, Masu had already argued for further rate hikes to normalize monetary policy; his latest speech demonstrates a reinforced determination. Japan's current interest rates are among the lowest globally, and the yield differential with major economies is seen as a core reason for the yen's persistent weakness. Masu's hawkish remarks also turn market attention to a speech scheduled for May 21 by another board member, Junko Koeda, who voted to maintain rates in April. BOJ Deputy Governor Ryozo Himino is also set to speak on Saturday. Currently, pricing in the overnight index swap market indicates traders assign about a 75% probability of a BOJ rate hike in June. The central bank will announce its policy decision on June 16. Regarding the yen's trajectory, U.S. Treasury Secretary Janet Yellen visited Tokyo earlier this week for a series of meetings with Japanese monetary and fiscal authorities. She and Japanese Finance Minister Shunichi Suzuki agreed that excessive volatility in the currency markets is undesirable. This move was interpreted by the market as tacit U.S. approval of Japan's recent FX interventions. However, Yellen also hinted that she would prefer Japan to support the yen through interest rate hikes rather than direct market intervention. On this point, Masu remarked, "We need to closely monitor whether inflation triggered by the yen's depreciation will raise public inflation expectations and, in turn, affect the trend of core inflation."
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