Photo/Illutration The Bank of Japan’s Policy Board members, including Governor Kazuo Ueda, center, attend a monetary policy meeting in Tokyo on April 28, 2023. (Pool)

Bank of Japan policymakers, in deciding a landmark increase in interest rates last month, discussed further rate hikes, a summary of the discussion showed on Thursday, prompting a hawkish shift that has contributed to global market turmoil.

One member of the policy board said the central bank should eventually raise its policy rate to around 1% or higher, according to the summary of opinions, the first time a BOJ policymaker has specified a potential endpoint.

In the surprise move on July 31, the central bank raised its short-term policy target to 0.25%, its highest in 15 years, from a zero-to-0.1% range, and released a plan for tapering its huge asset buying in a landmark shift away from a decade-long stimulus program.

The July increase and subsequent comments by BOJ Governor Kazuo Ueda signaling the chance of further rate hikes - along with indications that the Federal Reserve was preparing to cut U.S. rates - caused a spike in the battered yen and contributed to global market turmoil.

The nine-member board debated the risk that rising import costs and steady wage increases might push up inflation more than expected, the summary showed, highlighting a growing sense in the board that more rate hikes might be needed.

“The BOJ must proceed with further adjustment of the degree of monetary accommodation as appropriate,” even after July’s hike if companies continue to raise prices, wages and capital spending, one member was quoted as saying.

Those discussions, which market participants on Thursday said were more hawkish than expected, were likely behind Ueda’s market-moving comments. The ensuing rout led to remarks by BOJ Deputy Governor Shinichi Uchida on Wednesday playing down the chance of a near-term rate hike.

Finance Minister Shunichi Suzuki on Thursday declined to comment on Uchida’s remarks, telling a press conference the specifics of monetary policy are for the central bank to decide.

FOCUS ON INFLATION OVERSHOOT

One board member in July called for the BOJ to keep raising rates in a “timely and gradual manner,” as Japan’s neutral rate - the level of borrowing costs that neither cools nor overheats the economy - seems to be at least around 1%, the summary showed.

That was the first time a BOJ policymaker, even anonymously, has cited a specific level for Japan’s neutral rate.

Ueda has repeatedly said it is hard to specify Japan’s neutral rate, keeping markets wondering how far the central bank would tighten. While the BOJ does not issue an official estimate of the neutral rate, analysts see it between 1% and 1.5%.

At the July meeting, some members warned against hiking rates too soon, saying policy normalization “must not be an end in itself,” with recent data showing weak signs in consumption. Two board members voted against the July rate hike.

But discussions on the price outlook focused on the risk of an inflation overshoot, the summary showed.

“The likelihood of achieving our inflation target has increased further. That said, upside risks to prices require attention, since a rising number of industries have seen supply shortages and excess demand as a result of labor shortages,” one board member said.

“Upward pressure on prices is likely to remain because of tight labor market conditions” and rising import prices due to the impact of the yen’s declines, another said.

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