Japanese Central Bank Boss Opens Chance for Interest Rates to Rise to 1 Percent

Bank of Japan Governor Kazuo Ueda signaled that a rate hike still needs to be discussed at the BOJ's policy meeting this month. (Photo: Kyodo News)

JAKARTA - The Bank of Japan or BOJ has not ruled out raising interest rates this month. BOJ Governor Kazuo Ueda assessed that the option still needs to be discussed, even though the Iran war makes the direction of oil prices and the global economy still difficult to predict.

Citing Kyodo News, Thursday, June 4, Ueda said this in a speech at a Kyodo News event in Tokyo. He said the BOJ must thoroughly discuss the pros and cons of raising interest rates at the June 15-16 monetary policy meeting.

The statement kept market expectations that the BOJ could raise its benchmark interest rate from 0.75 percent to around 1 percent. If that happens, it will be the highest level in nearly 30 years.

Japan is in a sensitive position because it is highly dependent on commodity imports, including crude oil. If oil prices rise due to the Middle East conflict, production costs will rise. The end could be up to the price of goods and services paid by households.

Ueda said the rise in oil prices could potentially be passed on to consumers and spread to more goods than before.

"Most likely, the price increase due to the surge in crude oil is now being passed on faster and more easily to more types of goods," Ueda said, quoted by Kyodo News.

Price pass-through means that the increase in production costs is passed on by the company to the selling price.

According to Ueda, the initial impact could appear on plastic products, electricity tariffs, and distribution costs. After that, price pressures can spread to cars, construction, hotels, restaurants, and food and beverage services.

He reminded that too high inflation could suppress household purchasing power and burden the economy. However, it is too late to raise interest rates.

If the BOJ eventually has to raise interest rates massively to chase inflation, the burden on the economy, financial markets, and the financial system could be heavier.

The BOJ had previously held interest rates in three consecutive meetings until April. The central bank chose to monitor the impact of the Middle East conflict and the spike in oil prices. However, three of the nine members of the BOJ Policy Board at that time had already pushed for an interest rate hike due to concerns about inflation.

The Japanese bond market also moved. The yield on Japanese government bonds with a 10-year tenor touched 2.8 percent in May, the highest in about 29 years. Ueda said the rise in long-term interest rates reflected market expectations of faster Japanese inflation.

Under Ueda, the BOJ is slowly abandoning its ultra-loose monetary policy that has lasted for more than a decade. The central bank is increasingly confident that the 2 percent inflation target can be achieved sustainably.

According to Ueda, Japanese companies are now more daring to raise prices and workers' wages. The financing conditions are still loose. This condition is considered to still be an economic buffer in the midst of inflationary pressures.

In addition to interest rates, the BOJ will discuss the direction of government bond purchases after April 2027. So far, the BOJ has gradually reduced bond purchases as part of policy normalization.

Ueda said the Japanese bond market began to return to normal functioning after the purchase reduction was carried out. In the future, the BOJ will weigh two things, namely improving market functions and maintaining stability in the bond market.

Markets are now waiting to see whether the BOJ will raise interest rates and how the direction of bond purchases will be reduced after April 2027.