TOKYO - Facing a greater risk of faster price rises from a surge in oil prices coupled with a weaker yen, the Bank of Japan may need to accelerate the pace of policy interest rate hikes to guide inflation to its 2 percent target, economists say.
The Japanese central bank on Tuesday raised the policy rate to 1 percent, the highest since 1995, from 0.75 percent. The decision was the first hike since December last year and the fifth since the BOJ made the first increase in 17 years in March 2024.
"We will continue to raise policy interest rates...in accordance with economic, price, and financial conditions," given that the underlying inflation rate is approaching the inflation target and the current monetary environment is accommodative, BOJ Deputy Governor Shinichi Uchida said at a press conference after the rate increase to a 31-year high was decided. He offered few clues for the bank's future policy.
Governor Kazuo Ueda missed the two-day monetary policy meeting through Tuesday for medical treatment but he is expected to attend the next meeting in July.
Japan's core consumer prices, excluding volatile fresh foods, had remained above the 2 percent goal until the government subsidies lowered energy bills recently, supporting the BOJ's pursuit of interest rate hikes.
The latest hike came six months after the previous increase, compared with an 11-month gap before that.
More economists now expect the next move to come sooner, even as market participants mostly projected a rate hike every six months earlier in the year.
"The BOJ's message is clear that it will continue to raise interest rates," said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.
"I believe the interval until the next rate hike will be less than six months," with the move possibly coming in October, or even in September, he said.
Even as the United States and Iran signed a preliminary peace deal, economists say oil prices are unlikely to fall back to pre-Middle East crisis levels anytime soon.
The yen's weak tone against the U.S. dollar has changed little even after the BOJ's decision on Tuesday, remaining in the 160 zone to the dollar, a level that prompted Japanese authorities to intervene in recent months to stem the Japanese currency's slide.
A weaker yen is a problem for resource-scarce Japan as it boosts imported energy prices and inflation.
The outlook for oil prices and the yen's persistent weakness together threaten to increase upside risks to inflation. Recent BOJ data showed wholesale prices rose 6.3 percent in May from a year earlier, the fastest pace in more than three years, signaling that upward pressure on prices may intensify.
Koichi Fujishiro, chief economist at Daiichi Life Research Institute, said that the next rate hike could come in October due to the weak yen. Higher wholesale prices are also expected to be passed on to consumer prices, he said.
Economists say the BOJ's rate hikes could fail to keep pace with price increases, and if the bank misses the right timing for further tightening, inflation could accelerate further under the combined effects of oil prices and the weak yen.
Prime Minister Sanae Takaichi, known as a proponent of aggressive monetary stimulus, was once seen as making it politically difficult for the BOJ to raise rates flexibly when necessary.
But now working on measures to mitigate the impact of the rising cost of living, the prime minister appears concerned over such risks, economists say. Her government is anxious about inflation accelerating in the future and hopes for a pause in the yen's fall.
Such government concerns and reduced downside risks to the economy from the Middle East conflict are expected to encourage the BOJ under Ueda to raise rates more promptly than before, economists say.
By raising rates swiftly, Ueda could be "cooperating" with the government in preventing the Japanese currency from weakening substantially, Meiji Yasuda's Kodama said.
