Koeda Says BOJ Should Keep Hiking Rate at Appropriate Pace

Junko Koeda Photographer: Shoko Takayasu/Bloomberg Photo by Shoko Takayasu /Bloomberg

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(Bloomberg) — Bank of Japan Board Member Junko Koeda signaled support for raising benchmark interest rates, the latest indication that momentum is building for a move as early as next month.

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“I see some possibility that underlying inflation may exceed 2% looking ahead,” Koeda said Thursday in a speech to local business leaders in Fukuoka, western Japan. “I therefore believe it is reasonable for the Bank to raise the policy interest rate at an appropriate pace to address high inflation while also considering the trade-offs for the economy.”

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Koeda was among those who voted with the majority in favor of holding settings steady at the last policy meeting on April 28, in a 6-3 decision that was the biggest split under Kazuo Ueda’s governorship. While Koeda didn’t specify a preferred timing for the next move, her comments may support speculation over a hike the next time authorities decide policy on June 16.

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She is the second board member in that majority camp to signal the likelihood of rate hikes to come, joining Kazuyuki Masu, who said earlier this month that provided the economy holds up, authorities should hike “at the earliest stage possible.”

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As of Thursday morning in Tokyo, traders were projecting a roughly 80% chance of a rate hike next month, according to pricing in the overnight swaps market.

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Koeda said at an afternoon press briefing that authorities are closely watching the speed and magnitude of price increases by companies seen to be passing on rising labor and materials costs to customers, and said they will endeavor to avoid falling behind the curve on inflation. Earlier, she said, “The pace of price pass-through by firms seems to have accelerated compared with a few years ago.”

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Recent economic data showed that Japan’s economy is holding up even as it faces the fallout from the conflict between the US and Iran. The economy grew more than expected in the first three months of this year, according to a Cabinet Office report earlier this week. At the same time, producer prices jumped by the most since 2014 in April, highlighting building inflation momentum.

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Koeda, a former economists professor, also signaled some caution, saying it’s important to assess the impact from the Middle East conflict.

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She cited the need to gauge “to what extent external demand will weaken, and, under these circumstances, how Japan’s net exports will change in light of current exchange rate levels.” She also said authorities need to get a sense of how higher energy costs stemming from the turbulence are affecting domestic demand.

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Koeda said at her briefing that upside price risks are bigger than downside growth risks in her view. 

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Japan heavily relies on the import of natural resources. With few obvious prospects for ending the geopolitical turbulence, there is concern that fuel shortages and high prices could spur broader inflation as risks of an economic slowdown also emerge.