Bank of Japan's "hawkish" governor calls for rate hikes: inflation risks intensify as current policy rates still far below neutral level.

Naoki Tamura, the most hawkish member of the Bank of Japan's policy committee, is calling for an increase in interest rates, citing his belief that the risk of inflation is worsening. This view is consistent with his stance last month when he voted against maintaining the interest rates. Naoki Tamura stated on Thursday, "I believe that the Bank of Japan is currently at a stage where it should decide to raise policy interest rates. Through this measure, the degree of monetary easing can be adjusted, bringing the interest rate level closer to the neutral rate." This is Naoki Tamura's first public statement since he proposed to raise interest rates at the Bank of Japan's September policy meeting. His latest remarks indicate that despite the recent complication of Japan's political situation, leading many economists to lower their expectations of a rate hike by the Bank of Japan this month, his position has hardly changed. Based on overnight swap market pricing, as of the end of September, the market expected a 70% probability of a rate hike at the Bank of Japan's meeting on October 29th-30th, but this probability has now dropped sharply to about 15%. Naoki Tamura stated that the Bank of Japan is likely to achieve its stable 2% inflation target earlier than officially projected, possibly before the "latter half of the forecast period ending in March 2028." He added, "If the Bank falls behind in addressing inflation, it will have to raise policy rates quickly to stabilize prices, or else may ultimately cause severe damage to the Japanese economy." Since the Bank of Japan's September policy meeting, Japan's political situation has caused financial market volatility. Kishida, who advocates for loose monetary policies, unexpectedly won the Liberal Democratic Party's leadership election on October 4th, surprising investors. However, the ruling coalition between the Liberal Democratic Party and Komeito unexpectedly dissolved last Friday, casting a shadow over Kishida's prospects of becoming the next Prime Minister of Japan. Naoki Tamura reiterated his belief that Japan's neutral interest rate is at least around 1%, emphasizing the need for careful evaluation of the actual level during the gradual rate hikes by the central bank. He made it clear that one more rate hike is far from enough, as the current policy rate is still well below the neutral rate. Some observers of the Bank of Japan believe that Naoki Tamura's stance could signal an early shift in the central bank's policy. He had proposed a rate hike in December last year, and the Bank of Japan took action a month later. Naoki Tamura stated, "Considering that there are both upside and downside risks in economic activity and prices, from the perspective of risk management, I believe the central bank should gradually move closer to a neutral monetary policy stance."