Bank of Japan Member Signals Hawkish Stance, June Interest Rate Hike Expectations Rise Amid Inflationary Pressure

Bank of Japan policy board member Junko Koeda said to business people in Fukuoka on Thursday that under the backdrop of high inflation, it is reasonable for the central bank to raise the policy interest rate at an appropriate pace.. This statement is seen as another signal that the Bank of Japan may raise interest rates at the June meeting.

Koeda believes that Japan's underlying inflation may already be around 2%, and the situation related to conflicts in the Middle East may keep crude oil prices high for a while, thereby increasing the risk of inflation exceeding the Bank of Japan's target.

This means that the current challenge facing the Bank of Japan is not simply the rise in energy prices, but the risk of oil prices being transmitted to underlying inflation through corporate costs and household inflation expectations. If inflation continues to be higher than the target, the space for the central bank to maintain an accommodative monetary stance will be significantly reduced.

Koeda judged that the Japanese economy is unlikely to experience a severe recession similar to the global financial crisis or the COVID-19 pandemic period. The main supporting factors include a positive output gap, strong growth in global demand related to technology, and various support measures introduced by the government.

Prior statements by another Bank of Japan committee member and the summary of opinions from the April meeting have already sent hawkish policy signals. However, the Bank of Japan currently faces a more complex situation: the rise in oil prices itself will hold back the economy by suppressing corporate investment and private consumption, while raising interest rates will simultaneously push up financing costs.

The Bank of Japan Governor, Haruhiko Kuroda, has previously stated that if prices continue to rise and the economy can avoid a severe downturn, the central bank will tighten policy in a timely manner.