Bank of Japan Policy Board member Junko Koeda argued that the central bank should not be too cautious about raising policy interest rates, pointing to significant upside risks to prices and financial conditions that remain loose. She wants the BOJ to adjust the rate in a timely way, weighing economic and price conditions while keeping the estimated neutral rate range in mind, and she placed the neutral level well above 1 percent, near the lower bound of that range.

The inflation case behind her stance is firm. Koeda sees underlying inflation at about 2% over the past year or so, with sustained price rises across various CPI items and a shift in price distribution pointing to anchoring around that level. Steady wage gains are helping sustained inflation take stronger hold in Japan.

Financial conditions give policymakers room to act: she judges them accommodative overall, and companies’ financing conditions have stayed generally favorable. On the balance sheet, Koeda called it crucial to continue normalization calmly, and she suggested that changes in the BOJ’s government bond holdings may move long-term interest rates less during a reduction phase than during active expansion.

Looking ahead, she flagged price upside risks from yen depreciation, robust global AI demand and the Middle East situation. She also said the policy debate includes whether AI can drive investment that eases labor shortages and lifts productivity, and that policymakers must watch both AI-related exports and imports.

Key Quotes:

Monetary Policy

  • With significant upside risks to prices and ongoing loose financial conditions, BOJ should not be too cautious about raising policy interest rates

  • Central bank should adjust policy rate timely considering economic and price conditions, keeping estimated neutral rate range in mind

  • Neutral interest rate level is well above 1 percent, near lower bound of estimated range

  • Important to assess how policy rate change influences financial conditions, economic activity and prices

  • Still want to study accumulated effect of policy rate increases on household behavior

  • Recent rate hikes not necessarily expected to curb overall consumption of working generation

Inflation

  • Underlying inflation has been about 2% over the past year or so

  • Sustained price rises across various CPI items; change in price distribution indicates underlying inflation anchoring around 2%

  • Sustained inflation appears to be taking stronger hold in Japan as wages have also risen steadily

Financial Conditions

  • Overall, I believe Japan’s financial conditions have stayed accommodative

  • Companies’ financing conditions have generally stayed favorable

Balance Sheet

  • BOJ must continue calmly with normalization of its balance sheet

  • Impact on long-term interest rates of changes in central bank government bond holdings may be smaller during the reduction phase than the active expansion phase

AI & Productivity

  • Monetary policy debate includes if AI backs investment to address labor shortages and boost productivity

  • Looking ahead, it will be necessary to focus on both AI-related exports and imports

Energy & External Risks

  • Attention is focused on price upside risks from yen depreciation and robust global AI demand, plus the impact of the Middle East situation