TOKYO - Bank of Japan Governor Kazuo Ueda on Friday vowed further rate hikes given upward inflation risks, citing the possibility of "speeding up" the pace of increases, after the bank kept its benchmark rate unchanged at 1.0 percent following an increase to a 31-year-high in June.
Ueda said that the recent weakening of the yen against the U.S. dollar will be among the "important" factors, along with the Middle East situation and the increase in artificial intelligence-linked demand, when the bank considers the pace and timing of its monetary policy adjustments.
Noting that underlying inflation has been approaching the bank's 2 percent price stability target, Ueda signaled further policy rate hikes, saying financial conditions remain accommodative even after the last hike to a 31-year high from 0.75 percent.
An accommodative situation raises concerns that the economy could overheat and push up prices.
"We need to be more aware of the upside risks to prices than ever before. With this understanding, I want to make sure we have thorough discussions at the next policy meeting" onwards, Ueda said after a two-day policy meeting.
Financial markets expect the bank to lift the rate one more time by the end of this year. Policy meetings are scheduled for September, October and December.
The second day of the policy meeting came after the dollar-yen rate wildly fluctuated the previous day in New York trading, with market participants suspecting that Japanese authorities intervened in the foreign exchange market to strengthen the yen.
The Japanese currency has recently traded around its weakest level in more than 39 years against the U.S. dollar.
Although a weak yen is beneficial for Japanese exporters, given that it inflates their overseas profits when repatriated, excessive depreciation could dampen consumption and corporate profits by driving up import costs for fuel and other materials in the resource-poor country.
"By keeping an eye on the price situation, if we judge that the financial conditions are too accommodative, it is totally possible to speed up the pace of rate hikes," Ueda said.
In its quarterly economic outlook report, the central bank said rises in the consumer price index are expected to accelerate with businesses continuing to pass on wage increases to sales prices amid high crude oil prices and a weak yen, supporting market views that it may decide on another hike by the end of this year.
"The year-on-year rate of increase in import prices has recently risen substantially due to the depreciation of the yen as well as developments in commodity prices, such as high crude oil prices," the bank said.
The consumer price index is likely to "accelerate to a level clearly above 2 percent from the second half of fiscal 2026," the bank said in the report.
It also said it expects the Japanese economy to grow 0.6 percent in fiscal 2026, compared with its earlier projection of a 0.5 percent expansion.
While the U.S.-Iran conflict is expected to weigh on economic activity for fiscal 2026, the economy will be supported by factors such as the increase in global AI demand, the BOJ said.
For fiscal 2027, the central bank lifted the outlook to an expansion of 0.8 percent compared with 0.7 percent forecast earlier, noting that the negative effects of high crude oil prices will wane and that a "virtuous cycle from income to spending will gradually intensify."
Core consumer prices, excluding volatile fresh food prices, are estimated to rise 2.5 percent in fiscal 2026, against the 2.8 percent forecast in April due partly to the government's subsidy program to keep down energy costs, the report said.
Prices are then expected to increase 2.4 percent in fiscal 2027, revised upward from the earlier projection, the bank said.
"As for underlying CPI inflation, there is a risk that it will deviate upward to a level above the price stability target of 2 percent," the bank said in the report.
Of the nine Policy Board members, Hajime Takata voted against the action to keep the key short-term interest rate unchanged and called for a hike to around 1.25 percent, citing the need to respond to upside risks to prices.
The BOJ raised the key rate in June for the first time since December, warning that higher crude oil prices due to the Middle East conflict and the weak yen could strengthen inflation risks.
