Bank of Japan hawkish member: Inflation is expected to reach the target earlier than anticipated, Japan may need to "raise interest rates immediately"

Naoki Tamura, a member of the Bank of Japan's policy board, stated on Wednesday that the central bank should consider raising interest rates further without delay, as inflation may reach the target sooner than expected. The former commercial bank executive, viewed as hawkish, believes that even in the face of uncertainty regarding U.S. tariff policies, the central bank may need to act "decisively" to address rising price pressures.

While speaking to business leaders in Fukushima Prefecture, Tamura said:

The pace of rising inflation may exceed the Bank of Japan's forecasts, forcing the central bank to take decisive action in a globally uncertain environment. The likelihood of achieving the price stability target is high, and it may be realized sooner than expected.

This statement is clearly more hawkish than that of Bank of Japan Governor Kazuo Ueda, who previously emphasized the need to pause interest rate hikes due to the "extremely high" uncertainty surrounding U.S. trade policies. The Bank of Japan maintained its interest rates at last week's policy meeting.

Tamura's remarks highlight the internal divisions within the central bank regarding interest rate policy. Minutes from the June meeting released the same day showed that there were more cautious voices within the policy board, with some members believing it was appropriate for the central bank to maintain the current policy rate in the face of extreme uncertainty.

Rising Inflation Expectations May Exceed Central Bank Forecasts

Tamura stated that prior to Trump's announcement of tariffs in April, core inflation had been progressing towards the Bank of Japan's 2% target, and the pace of increase was slightly faster than expected. He believes that while U.S. tariffs will exert pressure on the Japanese economy and prices for some time, consumer inflation rates may remain around 2% during the fiscal year 2027.

Tamura said:

The consistently rising core consumer inflation is unlikely to turn downward, as companies are expected to continue raising wages and prices. Consumer inflation in Japan for April and May performed better than expected, and the recent rise in food prices may be driven by permanent factors such as long-term labor shortages and climate change.

Tamura believes that Japan's medium- to long-term inflation expectations are gradually rising as price increases become more widespread. He personally thinks attention should be paid to the inflation expectations of businesses and households, "I believe these expectations have reached around 2%."

Limited Impact of U.S. Tariffs Will Not Hinder Recovery

Regarding the impact of U.S. tariff policies, Tamura stated, tariffs may slow but will not hinder Japan's economic recovery, as tariffs primarily impact the manufacturing sector, which accounts for only about 20% of GDP.

He emphasized that the Bank of Japan's May forecasts should be viewed as temporary and are subject to significant revision based on developments in U.S. tariff policies. In the current forecast, the Bank of Japan expects core inflation to stagnate for a period before re-accelerating to levels consistent with the price target in the latter half of the three-year forecast period ending in fiscal year 2027.

Internal Divisions Within the Central Bank Becoming More Apparent

Tamura was the only dissenter at last week's policy meeting, opposing the central bank's decision to slow the pace of balance sheet reduction next year, instead calling for the current pace of bond purchase tapering to be maintained.

Minutes from the meeting released the same day showed that there were divisions among Bank of Japan policymakers, with some emphasizing the need to maintain ultra-low interest rates to assess the impact of U.S. tariffs, while others highlighted the increasing domestic inflation pressures. One member stated in the minutes: "Given the extreme uncertainty in the outlook, it is necessary to examine economic developments and other factors." Therefore, it is appropriate for the central bank to temporarily maintain the current policy interest rate."

The Bank of Japan ended its large-scale stimulus program last year after a decade and raised the short-term interest rate to 0.5% in January, believing that Japan is about to consistently reach the 2% inflation target. Although the central bank has indicated its readiness for further rate hikes, the economic impact of higher tariffs in the United States has forced it to lower its growth forecast and complicated the timing of the next rate hike decision