Inflation risk is greater than tariff uncertainty! A hawkish member of Japan's central bank warns: may need to raise interest rates decisively.

A hawkish member of the Bank of Japan's monetary policy committee said that even if the uncertainty surrounding US tariff policies continues, the Bank of Japan may need to "decisively" increase interest rates to address inflation risks. This statement highlights the Bank of Japan's concern about the growing price pressures. Bank of Japan board member Naoki Tamura said that inflation is accelerating at a pace exceeding his predictions at the Bank of Japan's last monetary policy meeting on May 1. He added that companies may start passing on labor costs by raising service prices to a greater extent. He said, "If the upside risks to inflation intensify, the Bank of Japan may need to take decisive action as the guardian of price stability." Tamura also noted that while US tariff policies may temporarily pressure the Japanese economy and prices, consumer inflation is expected to remain around 2% throughout the 2027 fiscal year. He said, "Our price stability target is likely to be achieved earlier than expected." Tamura's stance is more hawkish than that of Bank of Japan Governor Haruhiko Kuroda. Kuroda had previously emphasized the need to pause rate hikes due to "extremely high" uncertainty surrounding US tariff policies. According to forecasts released in May, the Bank of Japan expects core inflation to remain stagnant for a period, then accelerate to reach its target level in the latter half of its three-year forecast period ending in the 2027 fiscal year. Tamura noted that this forecast should be seen as temporary and may undergo significant revisions due to changes in US tariff policies. He said that while US tariffs may slow down, they are unlikely to disrupt Japan's economic recovery, as these tariffs primarily affect the manufacturing sector, which accounts for only about 20% of Japan's Gross Domestic Product (GDP). However, Tamura did not provide a clear indication of when the Bank of Japan might raise interest rates, only saying that the decision would largely depend on the evolution of US tariff policies and their impact on the economy. He said, "We need more information to judge whether core inflation has already reached 2%." When asked about the possibility of another rate hike by the Bank of Japan this year, he said, "I have no preconceived position. It could come early, or it could take some time." The Bank of Japan ended its decade-long massive stimulus program last year and raised short-term rates to 0.5% in January this year, believing that Japan is nearing the threshold for sustainable achievement of the 2% inflation target. While the Bank of Japan has indicated a willingness to further raise rates, the economic impact of US tariffs has led to a downward revision of growth expectations, making the timing of the next rate hike more complex. Meanwhile, consumer inflation in Japan has exceeded the Bank of Japan's 2% target for three consecutive years, as companies continue to pass on rising raw material costs to consumers. Tamura pointed out that consumer inflation data for April and May in Japan was stronger than expected, and recent increases in food prices may be driven by structural factors such as long-term labor shortages and climate change. He also said that as price increases become more widespread, Japan's medium to long-term inflation expectations are gradually rising. He said, "I personally believe that attention should be focused on the inflation expectations of businesses and households, as they are the true driving forces of economic activity. I believe that the expectations of businesses and households have roughly reached 2%." "As the likelihood of achieving the price stability target increases, or as the risks of upward price movements increase, we may need to take decisive action even in the face of higher uncertainty." At last week's policy meeting, the Bank of Japan kept the rate unchanged at 0.5% and said it will slow down the pace of purchasing bonds starting from the next fiscal year. As a former commercial banker, Tamura was the only committee member to oppose the decision to slow down the pace of bond purchases starting from the next fiscal year, advocating to maintain the current pace. Additionally, the summary of opinions from last week's Bank of Japan policy meeting showed internal divisions among Bank of Japan decision-makers, with some stressing the need to maintain ultra-low rates to assess the impact of US tariffs, while others are concerned about the increasing domestic inflation pressures.