BOJ Holds Rate at 1.0%; Ueda Says Pace of Hikes Could Accelerate

Bank of Japan Governor Kazuo Ueda signaled the possibility of additional interest-rate increases, raising the prospect of stronger upward pressure on the yen. The BOJ kept its policy rate unchanged at 1.0%, but Ueda delivered a hawkish message, saying inflation risks are increasing and the bank could speed up the pace of hikes if necessary.

The BOJ decided at its July 31 monetary policy meeting to keep the policy rate at 1.0%. Eight of the nine policy board members supported the decision. Board member Hajime Takata dissented, arguing for another rate increase.

Market attention focused less on the hold itself than on Ueda’s remarks at his press conference. He said the BOJ’s underlying inflation gauge, which the bank places particular weight on, is running above its 2% price-stability target and faces a risk of overshooting to the upside. Policymakers, he added, need to be more conscious than before of upside inflation risks, reinforcing the case for further rate increases.

Ueda also said the BOJ could raise rates at a faster pace if it judges financial conditions to be excessively accommodative. That signaled the bank could move more quickly than the roughly once-every-six-month pace currently expected by the market.

He pointed to crude oil prices, artificial intelligence-related demand and yen weakness as factors that could push inflation higher. Rising oil prices driven by tensions in the Middle East could lift energy and goods prices, while expanding global AI investment could feed into higher semiconductor prices. The weaker yen has also raised import costs and prices for durable goods.

Ueda described companies’ moves to raise wages and prices, along with rising medium- to long-term inflation expectations, as structural sources of price pressure. He said an excessive increase in underlying inflation could eventually hurt the economy and that the BOJ would fully discuss whether to raise rates at meetings after September.

In foreign-exchange markets, the remarks were seen as a potential catalyst for further yen strength. The currency had already surged after yen-buying intervention by the Japanese government and the BOJ the previous day, along with a rate check by US authorities. With the BOJ also leaving open the possibility of an early rate increase, pressure could build to unwind short yen positions.

The BOJ raised its policy rate to 1.0% in June, the highest level in 31 years. Even so, it maintained its view that corporate funding demand remains strong and financial conditions are still accommodative. The decision to leave rates unchanged at this meeting was seen as a move to assess the impact of the previous increase rather than a halt to the broader tightening path.

Questions also surfaced about the BOJ’s independence as the Sanae Takaichi administration takes a cautious stance on rate increases. Ueda said the central bank would continue to conduct monetary policy based on its own judgment and responsibility, signaling it could still raise rates in response to inflation conditions regardless of political pressure.

On the administration’s plan to cut the consumption tax on food products, Ueda said the BOJ would closely analyze the policy’s effect on consumption. Addressing concerns that aggressive fiscal spending could push up long-term yields, he said market confidence in medium- to long-term fiscal sustainability is important.

Ueda also said he would closely monitor the impact of the Kumamoto earthquake on the Japanese economy. The BOJ would do everything possible to keep financial functions and fund settlement operating smoothly, while assessing the spillover effects that any disruption to semiconductor plant production could have on growth and prices.

After Ueda highlighted both upside inflation risks and the possibility of faster rate increases, market focus is likely to shift to meetings after September. If inflation and the yen are stronger than expected, speculation is growing that the BOJ could move early with another rate increase.

Ueda was hospitalized for treatment of an infectious disease and was unable to attend the BOJ’s June monetary policy meeting. It was the first time a sitting BOJ governor had missed a regular meeting. He was later discharged and attended discussions from the first day of this meeting. At the press conference, Ueda said he had recovered and was carrying out his official duties as usual.

Despite the hawkish message, the yen remained weak. After the announcement, the dollar traded at about 160.7 yen. Atsushi Mimura, Japan’s vice finance minister for international affairs, declined to comment on whether authorities had intervened in the market.

Tokyo=Choi Man-su, Korea Economic Daily correspondent bebop@hankyung.com