Bank of Japan policymakers debated mounting inflation risks, with some members calling for faster interest rate increases during their June 15-16 meeting. The BOJ had already raised rates to a 31-year high of 1% as part of its policy normalization, signaling a readiness for further tightening to combat price pressures stemming from the Iran war-induced energy shock. Several opinions at the meeting warned of rising costs being passed on by firms due to the weak yen and the Middle East conflict, pushing up wholesale inflation to a three-year high of 6.3% in May.
One policymaker emphasized the need to bring Japan's policy interest rate closer to the neutral interest rate as soon as possible, noting that unlike in the United States and Europe, Japan's rate remains below this estimated range. Another member suggested that Japan's neutral rate appeared to be around 2% and advocated for reaching this level sooner by hiking the policy rate at a pace of once every few months. Several other board members also supported maintaining the BOJ's guidance for continued rate hikes, reinforcing market expectations that the BOJ will raise its policy rate again by year-end.
BOJ Governor Kazuo Ueda reiterated the central bank's commitment to raising interest rates as underlying inflation approaches its 2% target and financial conditions remain accommodative. The Middle East conflict has complicated the BOJ's policy path by increasing oil costs, hurting Japan's import-reliant economy. Despite a recent peace deal and the BOJ's rate hike, the yen has slid to near 40-year lows, keeping import costs high. While core consumer inflation has stayed below the 2% target due to government subsidies, analysts anticipate it will rebound above the target in the coming months, with services producer prices rising 3.3% in May due to surging fuel costs.
