FUKUSHIMA: The Bank of Japan may need to raise interest rates “decisively” to address inflation risks even if uncertainties over US tariffs persist, a hawkish member of its board said, highlighting the bank’s attention to growing price pressures.
Board member Naoki Tamura said underlying inflation had been on track towards achieving the BOJ’s 2 per cent target and rising at a slightly faster pace than expected until US President Donald Trump’s April announcement of sweeping reciprocal tariffs.
While the US tariffs will weigh on Japan’s economy and prices for the time being, consumer inflation is likely to move around the 2 per cent handle through fiscal 2027, he said on Wednesday (Jun 25).
“It is unlikely that underlying consumer inflation, which has been increasing, will turn downward” as companies are expected to stick to their practice of increasing wages and prices, Tamura told business leaders in Fukushima.
“There is a good possibility our price stability target will be achieved earlier than expected,” he said.
The remarks are more hawkish than those of governor Kazuo Ueda, who has stressed the need to pause rate hikes due to “extremely high” uncertainty surrounding US trade policy.
In current forecasts made in May, the BOJ expects underlying inflation to stagnate for some time, before re-accelerating to levels consistent with its price target in the latter half of its three-year projection period through fiscal 2027.
Tamura said the forecasts should be viewed as provisional and susceptible to big revisions depending on developments over US tariff policy.
US tariffs may slow, but not derail, Japan’s economic recovery as they mainly hit the manufacturing sector, which makes up just around 20 per cent of gross domestic product (GDP), he said.
SOLE HAWKISH DISSENTER
Japan’s consumer inflation, for its part, has been stronger than expected in April and May, Tamura said, adding the recent increase in food prices may be driven by permanent factors like chronic labour shortages and climate change.
Tamura also said Japan’s medium- to long-term inflation expectations have been rising gradually as price hikes become widespread.
“I personally believe focus should be placed on inflation expectations of firms and households, who are the actual drivers of economic activity. I take these expectations to have already reached around 2 per cent,” he said.
“When the likelihood of achieving our price stability target increases, or when upside risks to prices grow, we may face a situation where we should act decisively, despite heightened uncertainties,” Tamura said.
The BOJ ended a decade-long, massive stimulus programme last year and in January raised short-term interest rates to 0.5 per cent on the view Japan was on the cusp of durably meeting its 2 per cent inflation target.
While the central bank has signalled readiness to raise rates further, the economic impact of higher U.S. tariffs forced it to cut its growth forecasts and complicated decisions around the timing of the next rate increase.
The BOJ kept rates steady at 0.5 per cent at last week’s policy meeting. A former commercial banker, Tamura was the sole dissenter on the central bank’s decision to decelerate the pace of its balance sheet drawdown next year, calling instead to maintain the current pace of bond tapering.
At last week’s meeting, BOJ policymakers were divided between those stressing the need to keep ultra-low rates to gauge the impact of US tariffs, and others who highlighted mounting domestic inflationary pressure, a summary of opinions at the meeting showed on Wednesday.
