By Leika Kihara
FUKUI, Japan, Sept 10 (Reuters) – The Bank of Japan may eventually be forced to raise interest rates rapidly if inflation accelerates given the country’s loose financial conditions, board member Kazuyuki Masu said, warning of price risks that solidify the chance of a September hike.
In a closely watched speech ahead of next week’s policy meeting, Masu warned of broadening price pressures that have pushed underlying inflation “very close” to its 2% target.
He also said on Thursday the BOJ must pull real interest rates out of negative territory as soon as possible, signalling his concern over the demerits of too-low borrowing costs.
But Masu said recent data did not show signs of a big, rapid overshoot in inflation, suggesting the BOJ saw little need for a bigger-than-expected, 50-basis-point rate hike next week.
He refrained from giving explicit hints on the timing and pace of future rate hikes, stressing the need to carefully gauge how close the BOJ’s policy rate was to levels deemed neutral to the economy at each meeting.
“Underlying inflation is about to reach 2%, but we don’t see it sharply overshooting that level,” Masu said at a news conference. “What’s important is to ensure underlying inflation stabilises around our target.”
“As we have done so far, we must proceed cautiously in gauging the distance (from neutral rates),” Masu said when asked about the chance of a 50-basis-point rate hike.
UNNATURALLY LOW RATES
Masu’s remarks add to a slew of hawkish BOJ commentary and pressure from U.S. Treasury Secretary Scott Bessent that have cemented views the BOJ will raise interest rates this month.
The BOJ raised interest rates to a 31-year high of 1% in June on the view Japan was on the cusp of durably hitting its 2% inflation target. It kept rates steady in July but signalled a strong chance of a near-term hike on mounting price pressures from the Middle East war and a weak yen.
Analysts polled by Reuters expect the BOJ to hike rates to 1.25% next week and then to 1.75% in the second quarter of 2027, earlier than previously thought, amid persistent concerns over broadening price pressures and yen weakness.
In a speech delivered before the news briefing, Masu said a recent spike in producer prices warrants attention as it could push up consumer inflation more than in the past, with companies actively passing on higher costs from the Middle East conflict and the weak yen.
Rising fuel and chemical prices from the war in Iran could push up transportation costs which, coupled with rising food prices, could have a lasting effect on overall prices, he said.
“Financial conditions in Japan remain accommodative. If inflation accelerates here, there is a risk we might inevitably need to rapidly raise interest rates,” Masu said in the speech.
“I am convinced the BOJ needs to raise its policy rate further as it falls solidly within the estimated range of the neutral interest rate, thereby ensuring the flexibility needed to swiftly adjust the policy rate in either direction, depending on economic conditions,” he said on its policy normalisation.
BOJ staff has produced estimates showing Japan’s nominal neutral rate, or the level that neither cools nor overheats growth, to be in a range of 1.1% to 2.5%.
“The BOJ’s policy rate remains below the estimated neutral range and has been so for a very long time,” Masu said.
“It’s hard to say whether financial conditions will remain accommodative, even after a rate hike to 1.25%. But it’s unnatural for the BOJ’s policy rate to stay below the neutral rate band.”
Masu is seen by markets as among those in the nine-member board holding a neutral to somewhat hawkish view on monetary policy.
As for next week’s rate decision, Masu said he hoped to debate “thoroughly” with other board members about how factors like the impact of the yen’s recent rise on import costs, a renewed rise in crude oil prices and steady increases in global food prices could affect Japan’s inflation outlook.
Annual wholesale inflation remained elevated at three-year high levels in July, heightening the chance price pressures will spread to consumer goods as firms pass on higher costs. The BOJ will release on Friday wholesale inflation data for August.
Sources have told Reuters the BOJ is set to raise rates as soon as September and is considering hiking more aggressively thereafter.
(Reporting by Leika Kihara; Editing by Thomas Derpinghaus and Kim Coghill)
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