By Leika Kihara
FUKUSHIMA (Reuters) -The Bank of Japan may need to raise interest rates “decisively” to address inflation risks even if uncertainties over U.S. tariffs persist, a hawkish member of its board said, highlighting the bank’s attention to growing price pressures.
Board member Naoki Tamura said underlying inflation had been on track towards achieving the BOJ’s 2% target and rising at a slightly faster pace than expected until U.S. President Donald Trump’s April announcement of sweeping reciprocal tariffs.
While the U.S. tariffs will weigh on Japan’s economy and prices for the time being, consumer inflation is likely to move around the 2% handle through fiscal 2027, he said on Wednesday.
“It is unlikely that underlying consumer inflation, which has been increasing, will turn downward” as companies are expected to stick to their practice of increasing wages and prices, Tamura told business leaders in Fukushima.
“There is a good possibility our price stability target will be achieved earlier than expected,” he said.
The remarks are more hawkish than those of governor Kazuo Ueda, who has stressed the need to pause rate hikes due to “extremely high” uncertainty surrounding U.S. trade policy.
In current forecasts made in May, the BOJ expects underlying inflation to stagnate for some time, before re-accelerating to levels consistent with its price target in the latter half of its three-year projection period through fiscal 2027.
Tamura said the forecasts should be viewed as provisional and susceptible to big revisions depending on developments over U.S. tariff policy.
U.S. tariffs may slow, but not derail, Japan’s economic recovery as they mainly hit the manufacturing sector, which makes up just around 20% of gross domestic product (GDP), he said.
SOLE HAWKISH DISSENTER
Japan’s consumer inflation, for its part, has been stronger than expected in April and May, Tamura said, adding the recent increase in food prices may be driven by permanent factors like chronic labour shortages and climate change.
Tamura also said Japan’s medium- to long-term inflation expectations have been rising gradually as price hikes become widespread.
“I personally believe focus should be placed on inflation expectations of firms and households, who are the actual drivers of economic activity. I take these expectations to have already reached around 2%,” he said.
“When the likelihood of achieving our price stability target increases, or when upside risks to prices grow, we may face a situation where we should act decisively, despite heightened uncertainties,” Tamura said.
