TOKYO - Bank of Japan Governor Kazuo Ueda said Wednesday the central bank needs to "thoroughly" discuss the pros and cons of raising the policy interest rate at its next monetary policy meeting later this month even if the situation in the Middle East remains unclear.
Monetary policy decisions should be made on the premise that commodity-importing Japan is in a situation where the "secondary spillover effects of inflation stemming from higher crude oil prices are more likely to lead to an upward deviation in underlying inflation," Ueda said in a speech at a Kyodo News event in Tokyo.
Ueda warned that such an inflation uptick will exert downward pressure on the economy through such factors as a decline in the real purchasing power of households. He also pointed to the risk of responding too late to rising prices.
His remarks kept market expectations alive for another rate hike at the next June 15-16 meeting, possibly to a roughly 30-year high of 1.0 percent from the current 0.75 percent.
The BOJ stood pat for the third straight session in April to gauge the impact of the Middle East conflict and surging crude oil prices, though three of the nine Policy Board members called for raising the policy rate, citing inflation risks.
Should the BOJ be compelled to introduce a substantial interest rate increase to cope with inflation, it "could inflict a heavy burden not only on the economy but also on the financial markets and the financial system," he said.
The yield on the benchmark 10-year Japanese government bond has already been trending higher partially due to speculation about an early rate hike, briefly hitting 2.800 percent in May, its highest level in around 29 years.
The BOJ chief said Wednesday the recent rise in Japanese long-term interest rates reflects market expectations of accelerating inflation in Japan.
The central bank under Ueda has been gradually normalizing monetary policy after a decade of unorthodox easing, growing increasingly confident that its price stability target of 2 percent can be achieved.
Ueda appeared to set the stage for tighter monetary policy, pointing out that Japanese firms are more proactive than before in passing on higher costs to consumers and raising pay for workers while financial conditions are still accommodative.
"It is highly likely that the price pass-through stemming from the rise in crude oil prices is faster than before and more prone to spreading to a wider range of items," he said.
Ueda said higher oil prices would initially affect plastic products, electricity charges, and distribution costs before extending to final goods and services, including automobiles, construction, and accommodations as well as eating and drinking services.
While the bank "should be attentive to downside risks to economic activity, it should be more vigilant about the risk of a significant upward deviation in inflation materializing, which could exert an adverse impact on the economy afterward," he said.
Meanwhile, downside risks to economic activity, he said, can be minimized thanks to the accumulation of corporate profits and wage increases that predated the current Middle East conflict, as well as the securing of alternative sources of supply promoted by the government.
The BOJ has been gradually reducing the amount of government bond purchases, shifting toward policy normalization. At the next meeting, it is scheduled to present plans for bond purchases after April 2027.
In the speech, Ueda said the government bond markets are "regaining the function" they were originally expected to have due to the reductions implemented so far and stated that its approach about future purchases will be discussed considering the two elements of improving market functions and stabilizing the bond markets.
