By Leika Kihara
TOKYO, June 4 (Reuters) – Bank of Japan Governor Kazuo Ueda has all but cemented a June rate hike in a clear narrative pivot toward inflation fighting as the Iran war-driven energy shock sharpens price risks and opens the door to more frequent increases in borrowing costs.
In his speech on Wednesday, Ueda shed his dovish image and stressed the BOJ’s readiness to act against mounting inflation that could harm the economy if left unchecked.
That shift reframes Japan’s policy path, putting inflation risks, not just the achievement of stable 2% inflation, at the centre of rate decisions.
Crucially, he abandoned past ambiguity on supply shocks, making it clear the BOJ will no longer look through war-driven inflation if it risks spilling into broader, second-round effects.
The message marks a new phase in Ueda’s five-year term. Having spent his early tenure dismantling the remnants of his predecessor’s radical stimulus, he is now steering the BOJ towards a more conventional role: keeping inflation anchored.
The BOJ exited a decade-long massive stimulus in 2024 and has raised its policy rate several times, including in December, on the view that Japan was on the cusp of durably achieving its inflation target of 2%.
“Even if the situation surrounding the Middle East remains unclear, we must discuss the pros and cons of raising the policy rate if we judge that upside risks to prices outweigh downside risks to economic activity,” Ueda said, language that reinforced dominant market bets of a rate hike at the June 15-16 meeting.
The phrasing echoed remarks he made ahead of December’srate increase, when he flagged a similar “pros and cons” debate.
This time, however, Ueda went further by broadening the conditions under which rates could rise.
Until now, the BOJ’s tightening had been framed as a cautious, gradual exit from stimulus tied to achieving stable 2% inflation.
Ueda has now added a new trigger that zeroes in on inflation risks alone. With firms changing price-setting behaviour, he warned, energy shocks could amplify price pressures.
“Unless there’s a severe escalation in the conflict, the BOJ will probably hike rates in June,” said a source familiar with its thinking, a view echoed by another source.
Ueda also cautioned against waiting too long, noting that rising raw material costs are already lifting wholesale prices and could spread more broadly through the economy.
The change in communication highlights the BOJ’s growing concern over mounting price pressures, said veteran BOJ watcher Mari Iwashita, who sees a June rate hike as a done deal.
“The war-induced wave of price increases has only just begun and is likely to intensify around summer,” she said. “Ueda’s remarks suggest the BOJ is bracing for the chance of being forced to raise rates in autumn, possibly at a faster pace.”
SOOTHING GOVERNMENT JITTERS
At the same time, Ueda sought to calm the nerves of a dovish government over the potential economic damage from rate hikes.
He framed policy tightening as a defences against eroding household purchasing power. Mindful of the administration’s aversion to rising government borrowing costs, Ueda also pitched timely hikes as a way to anchor market confidence and prevent destabilising jumps in bond yields.
Despite the hawkish turn, the yen continued to weaken, underscoring persistent market scepticism. The currency remains near the 160-per-dollar level seen as Tokyo’s line in the sand for possible intervention, keeping pressure on import prices and the cost of living.
Even a June hike may not be enough to reverse the bearish yen trend.
Some analysts say it will take a stronger, sustained tightening signal to move the currency meaningfully.
“Even if the BOJ raises rates in June, any rebound in the yen will be limited,” said Rinto Maruyama, a strategist at SMBC Nikko Securities.
(Reporting by Leika KiharaEditing by Shri Navaratnam)
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