Koeda says BOJ should avoid excessive caution on further rate rises

The tenor of Koeda's remarks is hawkish: with the neutral rate put well above the current 1.25% policy rate and a warning against excessive caution, the door stays open to further BOJ rate hikes. The yen could draw some support from that, especially as expectations of further Fed rate increases have also risen, which leaves less room for the currency to weaken on rate differentials alone. Currency traders may take note of her point that the yen has partly lost its haven status, because geopolitical shocks could now hurt the yen through higher oil import bills rather than lift it. Japanese government bond yields could also come under upward pressure if investors begin pricing a faster route to neutral.

In short, Koeda is telling markets that 1.25% is not the final stop, and the BOJ should not allow caution to slow the journey.

Key points:

• Junko Koeda, a BOJ board member, said the central bank should not take excessive caution in raising its policy rate, with price risks tilted to the upside and financial conditions still accommodative.
• She sees the neutral rate as well above 1%, possibly above 2% on one estimate, while the policy rate is around 1.25% after September's hike.
• Underlying inflation looks to be anchoring around 2%, with more than 70% of the 500-plus CPI components higher from a year earlier.
• She identified upside price risks from geopolitical tensions, a weaker yen that has been less of a safe haven, and strong AI-related demand.
• Koeda sees the Japanese economy as broadly solid and called for continued balance-sheet normalisation.

Junko Koeda, a member of the Bank of Japan's policy board, said Thursday that the central bank should avoid being too hesitant to raise rates, pointing to considerable upside risks to prices and financial conditions that remain accommodative.

Speaking to local leaders in Kumamoto, she said the BOJ should act in a timely way when adjusting its policy rate, while keeping the estimated range of the neutral rate in view — the point where policy is neither boosting nor restraining the economy. The neutral rate is likely well above 1%, which she described as roughly the bottom of that range, and one estimate derived from potential growth could put it above 2%. The BOJ's own estimates point to a nominal neutral rate of around 1.1% to 2.5%. After the September rate increase, the overnight call rate is around 1.25%, so her logic implies room for additional moves.

Underlying inflation, Koeda said, appears to be getting anchored around the BOJ's 2% price stability target. More than 70% of the 500-plus components in Japan's consumer price index are up from a year earlier, and the distribution of price changes has moved higher. With wages also climbing steadily, sustained inflation appears to be taking firmer hold than before.

She laid out several sources of upside risk to prices. Shocks rooted in geopolitics — among them the Middle East situation since the spring — have repeatedly pushed up crude oil and commodity prices. Koeda also pointed out that the yen has been a less reliable safe haven in recent crises, weakening again during this year's Middle East escalation as oil surged and import costs rose. Inflationary pressure is also being fed by robust worldwide demand tied to artificial intelligence.

Turning to the economy, she called recent indicators broadly solid, citing high corporate profits, moderate growth in business investment and continued wage gains. According to her, rate increases were unlikely to significantly reduce household consumption, and corporate funding conditions stayed favourable.

Koeda also emphasised the need to keep normalising the BOJ's balance sheet, saying its substantial size should not be underestimated. The BOJ is trimming its monthly government bond purchases in stages and intends to hold them at about 2 trillion yen a month from April 2027.