Koeda’s message leans hawkish: by placing the neutral rate considerably above the current 1.25% policy rate and warning against excessive caution, she keeps further BOJ hikes firmly on the table. That should offer the yen some support, particularly against a backdrop where Fed hike expectations have also risen, which narrows the room for the yen to weaken on rate differentials alone. Her observation that the yen has lost some of its safe-haven role is notable for currency traders, since it suggests geopolitical shocks may now hurt the yen through higher oil import costs rather than help it. Japanese government bond yields may also face upward pressure if markets price a faster path toward neutral.
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Koeda’s message to markets is that 1.25% is not the destination, and the BOJ shouldn’t let caution slow the trip.
Summary:
- BOJ board member Junko Koeda said the bank should not become overly cautious about raising its policy rate, given considerable upside risks to prices and accommodative financial conditions
- She said the neutral rate is likely considerably above 1% and could be above 2% on one estimate, while the policy rate stands at around 1.25% after September’s hike
- Underlying inflation appears to be becoming anchored at around 2%, with more than 70% of the 500-plus CPI items rising year on year
- She flagged upside price risks from geopolitics, a weaker yen that has been less of a safe haven, and strong AI-related demand
- Koeda described Japan’s economy as solid overall and stressed continued balance sheet normalisation
Bank of Japan policy board member Junko Koeda said on Thursday that the central bank should not become overly cautious about raising interest rates, pointing to considerable upside risks to prices and financial conditions that remain accommodative.
In a speech to local leaders in Kumamoto, Koeda said the BOJ should adjust its policy rate in a timely manner while keeping in mind the estimated range of the neutral interest rate, the level at which policy neither stimulates nor restrains the economy. She said the neutral rate is likely considerably above 1%, which she described as roughly the bottom of the estimated range, and that one estimate based on potential growth could put it above 2%. The BOJ’s own estimates imply a nominal neutral rate of around 1.1% to 2.5%. Following the BOJ’s rate hike in September, the overnight call rate stands at around 1.25%, leaving room for further increases on her reasoning.
Koeda said underlying inflation appears to be becoming anchored at around 2%, in line with the BOJ’s price stability target. More than 70% of the over 500 items in Japan’s consumer price index are rising year on year, and the distribution of price changes has shifted higher, she said. With wages also increasing steadily, sustained inflation appears to be taking hold more than before.
She highlighted several sources of upside risk to prices. Geopolitical shocks, including the situation in the Middle East since the spring, have repeatedly driven up crude oil and commodity prices. Koeda also noted that the yen has been less reliable as a safe haven in recent crises, continuing to weaken during this year’s Middle East escalation as oil surged, which has pushed up import costs. Strong global demand linked to artificial intelligence is adding further inflationary pressure.
On the economy, Koeda described recent indicators as solid overall, citing high corporate profits, moderate growth in business investment and continued wage gains. She said rising rates were not expected to significantly reduce household consumption, and that firms’ funding conditions remained favourable.
Koeda also stressed the need to keep normalising the BOJ’s balance sheet, saying its substantial size should not be underestimated. The BOJ is reducing its monthly government bond purchases in stages and plans to hold them at about 2 trillion yen a month from April 2027.
This article was written by Eamonn Sheridan at investinglive.com.