BOJ members urged rate hikes; Ueda scrutinizes financial system risks

Some members of the Bank of Japan's policy board advocated for further interest rate increases to bring the central bank's policy rate closer to levels considered neutral for the economy, according to a summary of opinions released from their June meeting. One member was quoted as saying that Japan's policy interest rate remains below the estimated neutral rate range, unlike in the United States and Europe, and that it is necessary to move the policy rate closer to neutral as soon as possible.

Discussions at the June 16-17 meeting also revealed divisions regarding the pace of monetary policy adjustments. Some policymakers called for keeping interest rates steady for the time being, citing uncertainty over the potential impact of U.S. tariffs on Japan's economy. Conversely, other members observed that inflation was moving at higher-than-expected levels, with one suggesting the BOJ might need to raise interest rates "decisively" at some point, even amid significant economic uncertainty.

The central bank ultimately kept its benchmark interest rate steady at 0.5% and decided to slow the pace of its balance sheet reduction starting next year, signaling a cautious approach to unwinding its extensive stimulus measures. Several board members expressed concerns about the downward pressure U.S. tariffs could exert on business sentiment and Japan's fragile economy, with some noting that the full effects of these tariffs had yet to materialize. However, others were more sanguine, believing the impact would not deter firms from increasing wages and investments.

Rising inflationary pressures were also a point of discussion, with some members highlighting the impact of surging rice prices on perceived inflation and inflation expectations. Consumer inflation has consistently exceeded the BOJ's 2% target for over three years, driven partly by companies passing on increased raw material costs. Despite these inflationary trends and the readiness to raise rates further, the economic impact of higher U.S. tariffs has complicated decisions regarding the timing of the next rate increase.

Bank of Japan Governor Kazuo Ueda stated on Wednesday that the central bank must scrutinize how Middle East developments, the profitability of AI-related investments, and overseas non-bank activities could affect the country's financial system. He noted that Japan's financial system remains stable as a whole and added that the progress in generative AI technology has heightened the risk of cyber attacks.