Bank of Japan Policy Board member Kazuyuki Masu said on Thursday that the central bank will continue raising its benchmark interest rate, telling business leaders in Fukui Prefecture that underlying inflation is "very close" to the 2% target while financial conditions remain accommodative. "The Bank will continue to raise the policy interest rate," Masu said, adding that "what is most vital from now on is to ensure that the underlying inflation rate does not significantly exceed 2%." He warned that if price pressures intensify further, the Bank could be forced to "implement a rapid policy interest rate hike." The remarks came eight days before the conclusion of the BOJ's two-day policy meeting on 17–18 September.
The speech followed a tightening cycle that has taken the policy rate to 1%, the highest level in 31 years, after an increase at the June meeting and a hold in July. Masu, a former chief financial officer at Mitsubishi Corp who joined the Policy Board in July 2025, framed further increases as necessary to "complete the normalization of monetary policy" after decades of deflation and negative rates. He also stressed that the persistence of negative inflation-adjusted real interest rates "should be addressed as soon as possible," signalling concern over the costs of maintaining borrowing costs below the rate of price growth.
NEUTRAL RATE AND THE PACE OF NORMALISATION
Masu argued that the policy rate should be moved solidly into the BOJ's estimated neutral range, which he placed at 1.1% to 2.5%, leaving the current setting below its lower bound. "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. The formulation positions further tightening as a means of restoring optionality rather than as a restrictive stance, an argument that has gained traction among board members concerned that prolonged accommodation could force disorderly adjustment later.
He offered no specific guidance on the timing or size of future moves, saying the pace would depend on the likelihood of achieving the Bank's baseline projections and on the balance of risks, with particular attention to oil price movements, artificial-intelligence-related demand and foreign exchange fluctuations. At a subsequent news conference, Masu said recent data showed no sign of a sharp overshoot: "Underlying inflation is about to reach 2%, but we don't see it sharply overshooting that level." The comment was read as damping speculation that the Bank might opt for a larger 50-basis-point increase next week.
MARKET POSITIONING AHEAD OF THE DECISION
Swap contracts showed a roughly 97% probability that the BOJ will raise borrowing costs from 1% at the close of the 17–18 September meeting, with pricing concentrated on a 25-basis-point move to 1.25%. Analysts polled by Reuters expect the Bank to reach 1.25% next week and 1.75% in the second quarter of 2027, an earlier timeline than in previous surveys, reflecting persistent concerns over broadening price pressures and yen weakness. Sources have told Reuters the Bank is prepared to move as soon as September and is considering a more aggressive path thereafter.
Masu singled out the currency channel as warranting close attention, saying the effect of yen depreciation on domestic prices has become more pronounced than in past episodes. For banks and corporate treasuries, a move to 1.25% would push Japanese short-term rates further into territory unseen since the early 1990s, with implications for deposit repricing, loan margins and the valuation of long-held bond portfolios. The central question for markets after next week is no longer whether the BOJ tightens, but how far above the lower bound of its neutral range it intends to travel, and how quickly.