Bank of Japan board member Hajime Inaba said on September 10 that the country's underlying inflation is now very close to the 2% price stability target. Given that financial conditions remain accommodative, the central bank may be forced to raise its policy rate quickly if inflation continues to accelerate.

Inaba made these remarks during a meeting with members of the local business community in Fukui Prefecture. He noted that Japan has emerged from deflation, but real interest rates over one- to two-year horizons remain negative, which could push up real estate prices, encourage excessive corporate investment, and erode the real value of household savings. As a result, the negative real interest rate situation should be corrected as soon as possible.

Advocating Further Policy Normalization

Inaba argued that the Bank of Japan needs to raise interest rates further in order to gradually bring the policy rate into the estimated range for the nominal neutral rate. The bank currently estimates that range to be approximately 1.1% to 2.5%, while the current policy rate stands at 1%. He stated that raising the policy rate into the neutral territory would also preserve the central bank's flexibility to adjust in both directions, allowing it to hike or cut rates in a timely manner based on economic conditions. However, he did not specify a timeline or magnitude for the next rate move, emphasizing that a comprehensive assessment of prices, employment, and financial conditions is still required.

Cost-Push Pressures Expanding

Inaba said that Japanese companies are showing a stronger willingness to pass on higher costs to selling prices. The recent year-on-year rise in the corporate goods price index of approximately 7% could have a greater impact on consumer prices than in the past. Rising prices for energy and chemical products may also spread through transportation, packaging, and imported raw material channels. Additionally, there is a risk of renewed acceleration in food prices.

Furthermore, the effect of yen depreciation on prices has become more pronounced than before, while AI-related demand is pushing up prices for semiconductors, copper, electrical equipment, and certain consumer electronics. Inaba assessed that while Japan's underlying inflation remains below 2%, it is already very close to the target. Against this backdrop, the Bank of Japan will continue to raise its policy rate and reduce monetary easing, with the policy focus shifting toward preventing underlying inflation from clearly exceeding 2%.

Markets Focus on Pace of Hikes

The Bank of Japan raised its policy rate from 0.75% to 1% in June this year, reaching the highest level in approximately three decades. Inaba's latest remarks reinforce the direction of continued rate hikes, but the "possibly rapid rate increases" comment represents a risk scenario warning rather than an explicit commitment to action at the next meeting. Future policy decisions will primarily depend on energy prices, the yen exchange rate, the extent of corporate cost pass-through, and whether sustained gains in wages and service prices emerge.