BoJ board member calls for rate hike amid price risks

Bank of Japan (BoJ) board member Naoki Tamura called for raising interest rates as he sees increasing upside inflation risks, a view that’s consistent with his stance last month when he dissented from keeping policy steady."I believe that the bank is now in the phase of deciding on raising its policy interest rate,” Tamura said on Thursday in a speech to local business leaders in Okinawa, southern Japan. "Thereby adjusting the degree of monetary accommodation and setting the rate a little closer to the neutral interest rate.”Tamura spoke in public for the first time after he proposed raising the benchmark rate at the September policy meeting. His latest remarks suggest little shift in his stance even after Japan’s political landscape turned murky in recent weeks, prompting many economists to lower expectations for a rate change this month.Tamura said it’s increasingly likely the bank will hit its stable 2% inflation target earlier than its official view that it will happen in the second half of its projection period ending in March 2028."If the bank falls behind the curve, it will have to conduct policy interest rate hikes rapidly to stabilize prices, which could ultimately inflict significant damage on Japan’s economy,” Tamura said.Tamura, along with his fellow board member Hajime Takata, called for raising the policy rate from 0.5% at the September 18-19 policy gathering, in a hawkish surprise to BoJ watchers.Since then, Japan’s politics have contributed to financial market volatility. Sanae Takaichi, an advocate of monetary easing, surprised investors by winning a leadership election for the ruling Liberal Democratic Party on October 4. That was followed by another surprise on Friday, when the LDP’s coalition partner Komeito exited the arrangement, ending a 26-year relationship and clouding Takaichi’s prospects for becoming the next premier.All those moves contributed to a plunge in market bets on a rate hike at the October 29-30 meeting to around 15% from 70% as of the end of September, according to pricing in the overnight swaps market.Speaking to reporters in the afternoon, Tamura refrained from making it clear whether he plans to vote for a rate hike this month, although he noted a potential additional upside risk from a weak currency."A weak yen intensifies upside risks for inflation,” Tamura said. "We need to be mindful of the fact that the foreign exchange rate is more likely to affect inflation after businesses have become more active about raising prices and wages.”The yen was trading around 151 per dollar Thursday afternoon after sliding to an eight-month low of 153.27 on October 10. It’s depreciated by the most among major currencies this month.Tamura, a former executive at Sumitomo Mitsui Financial Group, reiterated his view that he estimates Japan’s neutral rate is at least around 1% while it has to be carefully examined where it stands as the bank raises rates. He clearly indicated that one more hike won’t be sufficient."The policy interest rate is still far away from the neutral interest rate,” Tamura said.Some BoJ watchers see Tamura as an early sign of a BoJ policy shift. He proposed a rate hike in December, only a month before the bank took the action."With both upside and downside risks to economic activity and prices, I believe that it is important from a risk management perspective for the bank to move closer to a neutral monetary policy stance,” Tamura said.