Bank of Japan Policy Board member Kazuyuki Masu said on Thursday that the central bank will continue raising its benchmark interest rate, speaking at a meeting with local leaders in Fukui 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, said further increases were needed to "complete the normalization of monetary policy", noting that Japan's economy is no longer in deflation. He also stressed that the persistence of negative inflation-adjusted real interest rates "should be addressed as soon as possible," warning that negative real rates could fuel a surge in real estate prices, prompt firms to invest more than necessary and erode the real value of household savings.
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 that the Bank needs to raise the policy interest rate further, so that 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.
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."
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.
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. A move to 1.25% would take the policy rate to its highest level since 1995.