Bank of Japan policy board member Junko Koeda said on Thursday 15 October that the central bank should not become overly cautious about raising interest rates. She pointed to considerable upside risks to prices and to financial conditions that remain accommodative. Speaking in Kumamoto, she indicated that the current 1.25% policy rate needs to be raised further.
Koeda told local leaders the BOJ should adjust its policy rate in a timely manner, keeping in mind the estimated range of the neutral rate, the level at which policy neither stimulates nor restrains the economy. She said the neutral rate is likely considerably above 1%, which she described as roughly the bottom of the estimated range. One estimate based on potential growth could put it above 2%, she added.
INFLATION APPEARS TO BE TAKING HOLD
Koeda said underlying inflation appears to be becoming anchored at around 2%, in line with the BOJ's price stability target. More than 70% of the over 500 items in the consumer price index are rising year on year, and the distribution of price changes has shifted higher. With wages also increasing steadily, sustained inflation appears to be taking hold more than before, she said.
ECONOMY HELD UP, BALANCE SHEET IN FOCUS
Koeda described recent indicators as solid overall, citing high corporate profits, moderate growth in business investment and continued wage gains. She judged the domestic economy as "overall still not bad", also citing a pause in the deterioration of consumer sentiment. Rising rates were not expected to significantly reduce household consumption, she said, and firms' funding conditions remain favourable.
She also stressed the need to keep normalising the BOJ's balance sheet, saying its substantial size should not be underestimated. The BOJ is reducing its monthly government bond purchases in stages and plans to hold them at about 2 trillion yen a month from April 2027.
RATE PATH AND THE OCTOBER MEETING
At its September meeting the BOJ raised its policy rate to 1.25% from 1%, with two board members dissenting in a 7-2 vote, leaving the overnight call rate at around 1.25%. The BOJ's own estimates imply a nominal neutral rate of roughly 1.1% to 2.5%, which on Koeda's reasoning leaves room for further increases.
Asked at a press conference later whether the BOJ could raise rates at consecutive meetings, Koeda said there was no predetermined pace for policy adjustments. The next policy meeting is on 29 and 30 October, when the board will release fresh growth and inflation forecasts that markets will scrutinise for signals on the timing of the next hike.
The Japan 10-year government bond yield eased to 2.93% on 15 October, down 0.07 percentage points from the previous session. Governor Kazuo Ueda said earlier in the week that policymakers would keep monitoring bond yields closely and that long-term rates should be determined by market forces.
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