Bank of Japan's Himino signals readiness to raise borrowing costs

TOKYO, Oct 21 : Japan's underlying inflation is quite close to the central bank's 2 per cent target and financial conditions remain loose, Deputy Bank of Japan Governor Ryozo Himino said on Wednesday, signalling readiness to raise borrowing costs.

The remarks reinforce market expectations that the BOJ will likely raise rates as soon as December, highlighting the central bank's view that its past rate hikes have yet to tighten financial conditions, leaving scope for further increases.

While rising fuel and raw material costs are pushing up prices, brisk global AI demand is also putting upward pressure on prices by boosting exports and capital expenditure, Himino told parliament.

"Given medium- and long-term inflation expectations continue to heighten, underlying inflation is quite close to 2 per cent and will likely converge to levels consistent with our price target," Himino said.

"Even after last month's rate hike, financial conditions remain accommodative" as seen in still-low real borrowing costs and strong growth in bank lending, he said.

"Given that inflation risks are high, delaying necessary adjustment to monetary support could materialise such risks and hurt the economy in the long run," Himino said, calling for the need to continue raising interest rates.

FISCAL, MONETARY CONTRADICTION

The BOJ raised its key rate to a 31-year high of 1.25 per cent last month, signalling its entry into a phase focused on preventing underlying inflation from overshooting its target and raising the prospect of tighter policy.

BOJ Governor Kazuo Ueda has warned that underlying inflation, or the broad price trend stripping away temporary, one-off factors, may overshoot its 2 per cent target on price pressures from the Middle East conflict, a weak yen and brisk AI demand.

Ueda has also said the BOJ will scrutinise signs of change in financial conditions for clues on how close its policy rate, now at 1.25 per cent, is to levels deemed neutral to the economy.

While the BOJ is expected to keep rates steady at its two-day meeting ending on October 30, it may raise its inflation outlook for the next fiscal year and maintain its focus on mounting inflationary risks, sources have told Reuters.

Some analysts warn the BOJ's efforts to tame inflation might be hampered by Prime Minister Sanae Takaichi's tax cut and big spending plans, which could boost demand and price growth.

The government will consider introducing a new round of electricity and gas subsidies during the winter to cushion the blow to households from rising heating bills, Kyodo news agency reported on Wednesday.

Speaking at the same parliamentary session, Finance Minister Satsuki Katayama said it was true that tax cuts generally work to push up inflation by stimulating demand.

"But we will ensure that our responsible and proactive fiscal policy boosts Japan's supply capacity in a way that does not accelerate inflation," Katayama said.