By Makiko Yamazaki
TOKYO, May 26 (Reuters) – Bank of Japan Deputy Governor Ryozo Himino said the central bank will consider the timing and pace of interest rate hikes with an eye on the fallout from the Middle East conflict, which could cause huge changes to its economic and price forecasts.
He also said the central bank must raise rates at an “appropriate pace” to maintain market trust that it was properly acting to control inflation.
With real borrowing costs remaining at very low levels, the BOJ will keep raising interest rates on the view the economy will continue to grow moderately, Himino said on Tuesday.
“But our baseline projection could change sharply depending on developments in the Middle East,” he told parliament.
“The timing and pace of such adjustments will be carefully considered by analysing how developments in the Middle East affect Japan’s economy and prices, and by assessing the likelihood of our baseline scenario being realised as well as the associated risks,” he added.
The remarks follow recent hawkish comments from BOJ policymakers that led markets to price in a roughly 80% chance of a rate hike at the next policy meeting on June 15-16.
On recent rises in Japanese government bond (JGB) yields, Himino said they are likely part of global yield spikes driven by market concern that surging fuel costs from the Middle East conflict will accelerate inflation worldwide.
“It’s important to maintain market confidence that inflation will be properly controlled by adjusting the degree of monetary easing at an appropriate pace in line with economic, price and financial conditions going forward,” Himino said.
The benchmark 10-year Japanese government bond yield touched 2.8% last week, a level last seen in October 1996, amid concerns about rising global inflation and Japan’s fiscal expansion.
The BOJ ended a decade-long, massive stimulus in 2024 and raised rates several times including in December on the view Japan was on the cusp of durably hitting its 2% inflation goal.
The Middle East conflict has complicated the BOJ’s task, as higher energy costs fuel inflation while simultaneously squeezing an economy heavily dependent on oil imports.
At the previous meeting in April, the BOJ kept rates steady but three of its nine-member board proposed a hike in a sign of policymakers’ growing concerns over inflationary pressures from the Middle East conflict. Himino voted for keeping rates steady.
The central bank also sharply revised up its price forecasts and stressed vigilance to the risk of an inflation overshoot.
(Reporting by Makiko Yamazaki; additional reporting by Leika Kihara; Editing by Sonali Paul, Shri Navaratnam and Sam Holmes)
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