Turn to a tougher hawkish approach! Bank of Japan board member Masu calls for interest rate hikes at the "earliest possible stage" if there are no economic risks

A policy committee member of the Bank of Japan called for a rate hike as soon as possible, under the condition that there are no signs of economic risks, and pointed out that the inflation risks triggered by the Iran situation are more sustainable. Bank of Japan member Kazuyuki Masu said at a local business conference in Kagoshima City in western Japan on Thursday: "If economic data does not clearly show signs of decline, I believe that we should raise interest rates as early as possible." This statement sends a strong signal: the Bank of Japan may restart rate hikes as early as the next meeting in June, in line with the increasing expectations of traders in the market. During the April meeting when the central bank kept interest rates unchanged, three members supported a rate hike, marking the largest division during Governor Haruhiko Kuroda's tenure; now Masu's statement further boosts the momentum for an interest rate hike. After Masu's speech was made public, the yen rose sharply. However, the yen later fell back, and as of the time of writing, the USD/JPY exchange rate was 157.85. Earlier on Thursday, the yen had fallen to its lowest level since April 30 - on that day, Japanese authorities intervened in the foreign exchange market for the first time since 2024. Neil Jones, Managing Director of Foreign Exchange Sales and Trading at TJM Europe, commented: "Masu's shift from a moderate hawk to a strong hawk is far more significant than the fluctuations in the exchange rate of the yen itself." Masu, who previously served as a senior executive at the major Japanese trading company Mitsubishi Corporation, mentioned that although the conflict in the Middle East that pushed up oil prices may be temporary, there is a risk of exacerbating Japan's "already high" distribution costs. He emphasized: "The market is concerned that these factors may not be short-term shocks, but may be long-term trends that push up prices." He further stated that the Bank of Japan needs to raise interest rates to a level close to the neutral level for the economy - a level considered to be between 1.1% and 2.5% - in order to be able to quickly respond to any surge in inflation. In February of this year, Masu had advocated for further rate hikes to return to normal monetary policy; his speech this time shows his determination to further strengthen rate hikes. Japan's current interest rates are at a global low, and the interest rate differential with major economies is seen as a core reason for the continued weakness of the yen. Masu's hawkish remarks also shift market attention to another board member, Junko Koeda, who supported keeping interest rates unchanged in the April vote and is set to speak on May 21. Bank of Japan Deputy Governor Ryozo Himino will also deliver a speech on Saturday. As of now, overnight index swap market pricing shows that traders expect a 75% probability of a rate hike by the Bank of Japan in June. The Bank will announce its rate decision on June 16. As for the yen's trend, earlier this week, US Treasury Secretary Janet Yellen visited Tokyo for a series of meetings with Japanese monetary and fiscal authorities. She reached a consensus with Japanese Finance Minister Kohei Otsuka that excessive fluctuations in the foreign exchange market are undesirable. This move has been interpreted as the United States tacitly allowing Japan's recent intervention in the exchange rate. However, Yellen also hinted that he prefers Japan to boost the yen through rate hikes rather than direct market intervention. Masu said: "It is necessary to closely monitor whether the depreciation of the yen will lead to inflation, whether it will push up public inflation expectations, and then affect the trend of core inflation."