The Bank of Japan should raise interest rates every few months and remain prepared to accelerate monetary tightening, according to hawkish board member Naoki Tamura.
His comments highlight the central bank’s growing focus on inflation risks linked to the Middle East conflict, rising import costs and persistent weakness in the Japanese yen.
The remarks followed the BOJ’s decision this month to raise its policy rate to 1%, its highest level in 31 years.
Energy Shock Adds to Japan’s Inflation Pressures
The conflict involving Iran has increased concerns about energy costs at a time when Japan is already facing inflationary pressure from a tight labour market and higher import prices.
In a speech delivered on Thursday, Tamura said Japanese companies were passing rising costs on to consumers more rapidly and broadly than they did following Russia’s invasion of Ukraine in 2022.
He attributed the shift to significant changes in corporate price-setting behaviour.
BOJ Official Sees Underlying Inflation at 2%
Tamura said Japan’s underlying inflation rate had already reached the BOJ’s 2% target.
He also warned that inflation expectations were continuing to rise, meaning policymakers must remain alert to upside risks even if tensions in the Middle East ease.
Tamura’s baseline scenario involves raising the policy rate by 0.25 percentage points every few months until it approaches the estimated neutral rate of 2%.
The neutral rate is generally considered the level at which monetary policy neither stimulates nor restricts economic activity.
Faster BOJ Rate Hikes Remain Possible
Tamura said the Bank of Japan should be ready to increase either the frequency or the size of its rate hikes if inflation risks intensify.
He added that consecutive increases could become an option if there were stronger signs that inflation was likely to exceed expectations.
However, Tamura said immediate back-to-back rate hikes were not currently necessary.
The BOJ’s preferred approach would be to assess how each increase affects Japan’s economy, inflation and financial markets before taking further action.
July BOJ Meeting Comes Into Focus
The Bank of Japan will hold its next policy meeting on July 30 and 31.
Markets widely expect the central bank to leave interest rates unchanged. However, investors will closely examine the BOJ’s updated quarterly forecasts for clues about the timing of the next rate increase.
Tamura was one of three board members who unsuccessfully proposed raising interest rates during the BOJ’s April meeting.
Although his position is more hawkish than that of several other policymakers, his comments reflect growing concern inside the central bank about persistent inflation.
Weak Yen Increases Pressure on the BOJ
Japan’s consumer inflation has remained close to the BOJ’s 2% target for almost four years.
Although easing Middle East tensions have pushed crude oil prices lower, the yen remains close to a four-decade low against the U.S. dollar.
The currency’s weakness raises the cost of imported goods and adds to inflationary pressure across the Japanese economy.
Tamura said exchange-rate movements had become increasingly important for Japan’s growth and inflation outlook.
Changes in corporate wage and pricing behaviour mean that currency fluctuations now have a greater impact on consumer prices than they did in the past.
US-Japan Rate Gap Remains a Key Concern
The weak yen has also increased pressure on the Bank of Japan to avoid a further widening of the interest-rate gap between Japan and the United States.
Higher U.S. rates make dollar-denominated assets more attractive, encouraging investors to sell yen and buy dollars.
Further BOJ tightening could help reduce this gap and provide some support for the Japanese currency.
Political Pressure Could Complicate Further Tightening
Japan’s government may make additional rate increases more difficult.
A draft of the government’s long-term economic strategy reportedly calls for monetary policy that supports private demand. This suggests that officials would prefer borrowing costs to remain relatively low.
Higher interest rates could weaken household spending and business investment, even as they help control inflation and support the yen.
A Reuters survey conducted before the June rate increase showed that most economists expected the BOJ to raise its policy rate to 1.25% during the fourth quarter.
