BOJ Policymaker Indicates Willingness to Raise Rates If Inflation Continues on Track – Reuters

By Leika Kihara and Takahiko Wada

TOKYO/AKITA, Japan – The Bank of Japan (BOJ) plans to continue raising interest rates if inflation aligns with its forecasts, according to policymaker Junko Nakagawa. This statement indicates that last month’s market fluctuations have not derailed the bank’s intention to gradually increase borrowing costs.

Nakagawa emphasized the need for the central bank to consider the potential impact of market movements on the economic outlook and price stability when evaluating rate hikes. Her comments resulted in a rise in the yen, as investors interpreted them as a sign that the BOJ might increase rates in the near future. On Wednesday, the dollar traded at 140.79 yen, marking a decline of over 1% and the lowest level since December 2022, influenced also by the recent U.S. presidential debate outcomes.

“Given that real interest rates are very low, we will adjust the degree of monetary support, aiming to sustainably and stably achieve our 2% inflation target, provided our economic and price forecasts are met,” Nakagawa stated during a speech to business leaders in northern Japan.

Core consumer inflation recorded 2.7% in July and has remained at or above the 2% target for the past 28 months. Nakagawa’s comments followed remarks from fellow BOJ policy board member Hajime Takata, who advocated for cautious rate increases to prevent adverse effects on businesses from volatile markets.

The BOJ is expected to maintain its current rates at the upcoming meeting on September 20, yet more than half of the economists surveyed anticipate further tightening by the end of the year. After a meeting with business leaders, Nakagawa remarked that recent data suggests economic and price conditions are progressing favorably but acknowledged the ongoing market instability.

Since the BOJ ended negative interest rates in March and raised the short-term policy rate target to 0.25% in July—significant moves marking a departure from a long-standing massive stimulus strategy—the yen has strengthened against the dollar, contributing to a decline in global share prices.

While Nakagawa noted that Japan’s economic fundamentals remain robust, she indicated that the BOJ must remain vigilant regarding market developments following the July policy change to evaluate their impact on the economy. Japan’s economy recorded an annualized growth of 2.9% in the April-June period, supported by wage increases boosting consumer spending. Despite consistent capital expenditure growth, uncertainties from soft demand in China and slowing growth in the U.S. pose risks to the export-dependent economy.

Nakagawa expressed concerns regarding uncertainties abroad but mentioned that consumer spending is expected to rise moderately due to increased wages, which would contribute to rising inflation trends. She also highlighted potential upward risks to the country’s price outlook stemming from a tight labor market and rising import prices.

“There’s a chance that wage growth may exceed expectations due to a tight labor supply, so we need to be aware of the risk that inflation could surpass our target,” Nakagawa stated in her address.

Previously the chairperson of Japan’s Nomura Asset Management, Nakagawa is regarded in the markets as having a neutral position concerning monetary policy.