By Leika Kihara
TOKYO, Sept 28 (Reuters) – Many Bank of Japan policymakers saw the need to focus on mounting inflation risks, with some calling for faster interest rate increases, minutes of their July meeting showed, cementing the case for further hikes to still-low borrowing costs.
After raising interest rates in June, the central bank paused in July before pushing its policy rate to a 31-year high of 1.25% this month, as the Middle East war and a stubbornly weak yen lifted prices of fuel and raw material imports.
Given mounting inflation risks, many in the nine-member board said the BOJ was gradually shifting its policy focus towards anchoring underlying inflation around its 2% target, rather than pushing up prices, the minutes showed on Monday.
“Markets appeared to be expecting the BOJ to raise interest rates with intervals of about six months. But the pace of rate hikes could be faster than such market expectations, given underlying inflation had approached 2% and the greater need to focus on upside price risks,” one member was quoted as saying.
A different member said the BOJ must pay particular attention to upside price risks and “adjust its policy rate nimbly,” the minutes showed.
The BOJ must speed up rate hikes as the risk of waiting was no longer marginal, a third member was quoted as saying, warning that the economy will face huge damage if inflation risks materialise.
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At the July 30-31 policy meeting, the BOJ kept interest rates steady at 1%, but it warned that underlying inflation could exceed its target and said future policy discussions would focus on upside price risks.
The July minutes indicated growing concern within the board of mounting inflation risks, with some members projecting rising wholesale prices spreading to broader-based inflation.
Many members said long-term inflation expectations were heightening for both households and companies. One said the BOJ must scrutinise whether such expectations would stabilise around 2%, as it sought to anchor underlying inflation at its target.
With the BOJ having raised rates in June and September, many analysts see a growing chance it will keep hiking at shorter intervals than the roughly twice-a-year pace of 2024 and 2025.
The BOJ faces greater pressure to raise rates than other major central banks, as its policy rate remains near the bottom of the estimated 1.1% to 2.5% range of Japan’s nominal neutral rate — or the level that neither cools nor overheats growth.
“Even if the precise level of neutral could not be determined, the BOJ must raise its policy rate, which remains below the lower bound of the broadly estimated neutral rate range, to set the foundations of policy normalisation and ensure it can nimbly adjust policy,” the July minutes quoted one member as saying.
A key gauge of Japan’s service-sector inflation rose in August at the fastest annual pace in more than two years, data showed on Monday, highlighting mounting price pressures.
Many analysts expect the BOJ to revise up its inflation forecasts in a quarterly report due at its next policy meeting on October 29-30. The analysts predict the central bank will hike again as soon as October or December.
Expectations of further rate hikes pushed the benchmark 10-year Japanese government bond (JGB) yield to 3.115% on Friday, a level last seen in August 1996.
(Reporting by Leika Kihara; Editing by Thomas Derpinghaus and Sonali Paul)
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