Some Bank of Japan members call for faster rate hikes, summary shows

By Leika Kihara

TOKYO, June 24 (Reuters) - Bank of Japan policymakers ‌debated mounting inflation risks, with ​some calling for ​faster interest rate increases to raise borrowing costs nearer levels deemed neutral to the economy, a summary of the latest policy review showed on Wednesday.

At the June 15 to 16 meeting, the BOJ raised rates to a 31-year high of 1% in a landmark step in its ‌policy normalisation, signalling readiness to tighten further as it focuses on taming price pressures from the Iran-war-induced energy shock.

Most of the opinions ⁠warned of mounting price pressures as firms actively passed on rising costs from the weak yen and the Middle East conflict, the summary showed.

While one member warned that inflation expectations were showing signs of ‌shifting upward, another said global AI-related demand was ‌boosting economic activity and prices more than expected, according to the summary.

"Unlike in the United States and Europe, Japan's policy interest rate remains below the estimated range of the neutral interest rate. It is necessary to bring the policy rate closer to the neutral rate as soon as possible," one member was quoted ​as saying.

Another member said Japan's estimated neutral rate appeared to be around 2%, adding that the BOJ must raise its policy rate to that level sooner by hiking at a pace of once every few months, the summary showed. Several others also called for maintaining the BOJ's guidance to continue raising rates.

The discussions reinforce ⁠dominant market views the BOJ will raise its policy rate again by the end of this year. A Reuters poll, taken before the June hike, showed most economists projecting a rate hike to 1.25% in the fourth ​quarter.

UNCERTAINTY LOOMS

In a speech read out by his deputy, BOJ Governor Kazuo Ueda on Wednesday reiterated the central bank's resolve to keep raising interest rates as underlying inflation approaches its 2% target and financial conditions remain accommodative.

But the future rate-hike path is ​fraught with uncertainty.

At the June meeting, newcomer Toichiro Asada voted against the rate hike on ‌the view that downside risks to output and jobs from the Middle East conflict outweighed inflationary risks.

"The downside risks to production and employment may disrupt the virtuous cycle between wages and prices. In the worst-case scenario, this could potentially push Japan back to deflation," ⁠one member was quoted as saying in the summary.

While the summary does not identify policymakers, the view is widely seen as that of Asada, the first appointee under dovish Prime Minister Sanae Takaichi to the board.

In a sign of the government's reservations over further rate hikes, a Cabinet Office representative said the BOJ must take "proactive and appropriate action" in the event of excessive ⁠economic fluctuations, the summary showed.

The BOJ must also conduct policy taking into account the administration's initiatives to promote growth, the Cabinet Office representative was quoted as saying.

The dovish dissenting vote by Asada ​and the BOJ's decision this month to halt bond tapering next fiscal year may reflect the influence of political pressure to some extent, said Takuho Morimoto, an economist at JPMorgan Securities Japan.

"However, we believe sustained upside inflation risks and market pressure, via FX and long-term interest rates, will ultimately support a BOJ rate hike in October," Morimoto said.

The Middle East conflict has complicated ‌the BOJ's policy path by adding inflationary pressure through higher oil costs, while hurting an economy heavily reliant on imported fuel.

The yen has slid near 40-year lows despite this month's BOJ rate hike, keeping the cost of importing raw materials high.

While the ‌peace deal between the U.S. and Iran has pushed down crude oil prices, Japan's wholesale inflation spiked to a three-year high of 6.3% in May, a sign companies were already passing on ⁠higher costs from the energy shock.

Data released on Wednesday showed services ‌producer prices in May rose 3.3% from a ​year earlier, as surging fuel prices pushed up freight and air transportation costs.

Core consumer inflation has remained below the BOJ's 2% target due to government subsidies to curb fuel costs, but analysts expect it to rebound above the target in coming months.

(Reporting by Leika Kihara; Editing ‌by Jacqueline Wong)

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