By Leika Kihara and Takahiko Wada
TOKYO, July 8 (Reuters) – Bank of Japan board member Toichiro Asada said he must see signs of demand-driven inflation before supporting interest rate rises, but flagged “relatively rapid” pass-through of higher costs in a sign he may vote in favour of a hike in the future.
Asada, the sole dissenter to the BOJ’s decision in June to raise interest rates to a 31-year high of 1%, made the comments in his first interview since joining the board, underscoring a growing tension between political pressure for loose policy and mounting inflationary pain as firms pass on rising costs.
Hand-picked by dovish Prime Minister Sanae Takaichi, Asada said he voted against the June rate increase due to lingering uncertainty over Middle East developments that could hurt output and employment.
The key prerequisite for supporting a future rate hike would be for Japan to see conditions fall in place to sustainably meet the BOJ’s 2% inflation target, he told Reuters on Monday.
“Moreover, I believe it is necessary to confirm that such achievement is being supported by endogenous economic forces, such as rising wages and demand,” he said, adding that such forces are not strong enough yet to justify raising rates.
But Asada said he is “not always opposed” to rate rises, with future decisions dependent on economic conditions at the time.
While crude oil prices are falling and consumer inflation is moderating, the pass-through of higher oil prices has been proceeding at a “relatively rapid pace” and could lead to broader price rises for a wide range of goods, he said.
“The BOJ should respond flexibly to changes in economic, price and financial conditions and conduct monetary policy appropriately,” Asada said, adding that rate decisions should not be made on any pre-determined schedule.
“The pace of any tightening should likewise be determined after carefully assessing domestic and overseas economic, price, and financial developments,” Asada said.
The remarks by Asada, seen as a reflationist advocate of loose fiscal and monetary policy, underscore the BOJ’s growing attention to mounting inflationary pressure.
The BOJ raised interest rates in June and signalled its readiness to keep hiking as inflation has hovered around its 2% target for four years. Most analysts polled by Reuters expect another rate rise in October to December.
When asked whether he supported the BOJ’s rate-hike stance, Asada said: “I am not always opposed to rate hikes. I voted against one this time, but I intend to make decisions based on an assessment of prevailing conditions at each point in time.”
Asada also said he believed Japan’s neutral rate, or the level that neither cools nor overheats the economy, to be “rather low” but that it was hard to specify an exact level.
“The neutral rate should not become an objective in itself. Policy should remain anchored to the goal of price stability.”
BOJ staff have produced estimates suggesting Japan’s nominal neutral rate stands around 1.1% to 2.5%.
CLOSE POLICY COORDINATION
Takaichi’s appointment of Asada and another dovish newcomer, Ayano Sato, to the board has been viewed by analysts as an attempt to pressure the BOJ into supporting the administration’s big spending plans by keeping rates low.
Asada called for close coordination between fiscal and monetary policy, as there were limits to what monetary policy alone can do to overcome weak demand or supply constraints.
While government efforts to promote investment are important, many firms point to labour shortages and rising material costs as constraints to investment, he said.
Wholesale inflation accelerated in May at the fastest pace in three years as a weak yen pushed up import costs, adding to rising fuel costs from the Middle East conflict.
“Given these circumstances, achieving price stability through appropriate monetary policy is important as a foundation for expanding growth-oriented investment,” Asada said.
While monetary policy does not target currency rates, it “does take inflation and employment into account,” Asada said, stressing the role the BOJ must play in controlling inflation.
RATIO OF JGB HOLDINGS TO GDP KEY
The BOJ has been slowing the pace of bond buying since 2024, but decided in June to discontinue the taper from next fiscal year, a move analysts saw as aimed at curbing rises in bond yields.
Asada said the taper pause could help mitigate the negative impact excessive yield rises could inflict on investment.
In the future, the BOJ must discuss the desirable size and composition of its huge balance sheet, which will keep shrinking as redemptions exceed monthly purchases, he said.
In doing so, the BOJ should focus on how much the ratio of its government bond holdings to nominal gross domestic product (GDP) should fall from current levels around 80%, he said.
“Once the ratio has fallen to a level considered appropriate, I believe the size of the BOJ’s balance sheet should thereafter grow broadly in line with nominal GDP growth.”
(Reporting by Leika Kihara and Takahiko Wada; Editing by Jacqueline Wong)
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