Bank of Japan Deputy Governor Signals More Rate Hikes, Saying Underlying Inflation Is Near 2% Target

The Bank of Japan is prepared to keep raising interest rates, one of its top officials signalled on Wednesday, October 21, adding to expectations that the world's last major holdout from ultra-loose monetary policy will continue to tighten.

Deputy Governor Ryozo Himino said underlying inflation in Japan is "quite close to 2%," the central bank's target, and that "even after last month's rate hike, financial conditions remain accommodative," Reuters reported. He warned that delaying policy adjustments could risk fuelling inflation.

Himino's comments echo recent remarks by Governor Kazuo Ueda and reinforce the view that the BOJ will continue raising rates gradually, with markets watching its next policy meeting on October 30.

A cautious hawk

Himino's message was that the BOJ is still some distance from a neutral policy stance. Even after last month's increase, which took the policy rate to 1.25%, real interest rates in Japan, adjusted for inflation, remain deeply negative. That means monetary policy is still stimulating the economy, at a time when inflation has persisted above the central bank's target.

The deputy governor also pointed to demand linked to artificial intelligence as a source of upward pressure on prices. Japan's economy has benefited from global investment in AI, particularly through its semiconductor equipment and materials makers, whose products are essential for building advanced chips.

By warning that delaying adjustments could add to inflation, Himino signalled that the BOJ does not want to fall behind the curve, a risk that could force it to raise rates more sharply later.

The end of an era

The BOJ's tightening marks a historic shift. For decades, Japan battled deflation and weak growth, and the central bank kept interest rates near or below zero while buying vast quantities of government bonds. It ended negative interest rates in 2024 and has raised rates several times since.

Japan's inflation has been driven by a combination of factors: a weak yen, which raises import costs; higher energy prices; and rising wages, as companies respond to labour shortages. Annual wage negotiations have delivered the biggest pay increases in decades, a development the BOJ sees as essential for sustained inflation.

The BOJ's challenge is to normalise policy without derailing the economy or triggering turmoil in bond markets. Japan has the highest government debt burden among major economies, and rising interest rates increase the cost of servicing that debt.

The yen and global markets

Himino's comments came as the yen traded at about 158.33 per dollar, near levels that have previously prompted Japanese authorities to intervene in currency markets. A weak yen has been a persistent concern for Japanese policymakers, as it raises import costs and erodes household purchasing power.

Higher Japanese interest rates could support the yen by narrowing the gap with US rates. However, with US Treasury yields above 5% and the Federal Reserve considering further increases, the interest rate gap remains wide.

BOJ policy has significant implications for global markets. For years, investors borrowed cheaply in yen to invest in higher-yielding assets abroad, a strategy known as the carry trade. Rising Japanese rates can prompt investors to unwind those positions, causing sudden swings in global markets, as happened in August 2024.

A global tightening backdrop

The BOJ is not alone in considering tighter policy. Persistent inflation, driven in part by high energy prices and strong AI-related investment, has pushed several central banks to keep rates elevated or raise them further. In the United States, traders are pricing a high probability that the Federal Reserve will raise rates in December.

The rise in global bond yields has rattled markets in recent weeks. The US 10-year Treasury yield is at multi-decade highs, and bond yields in Europe and Japan have also climbed. Higher yields increase borrowing costs for governments, companies and households, and can weigh on stock valuations.

What it means for India

For India, BOJ tightening matters in several ways. Japan is a significant source of foreign investment in India, both through direct investment by Japanese companies and through portfolio flows. Rising returns in Japan could make Japanese investors more inclined to keep money at home.

Global monetary tightening also puts pressure on emerging market currencies. The rupee has weakened significantly this year, trading around 94.6 per dollar, as foreign investors have pulled money from Indian equities and high oil prices have widened the trade deficit. A further rise in global yields could add to that pressure, complicating the Reserve Bank of India's task of managing inflation and growth.

Who is Ryozo Himino

Ryozo Himino became deputy governor of the Bank of Japan in March 2023, alongside Governor Kazuo Ueda. A former commissioner of Japan's Financial Services Agency, the country's financial regulator, he brings deep expertise in banking supervision and financial stability. His views are closely watched because, as one of the BOJ's top officials, he helps shape the consensus on the policy board.

How the BOJ communicates

The BOJ typically signals its intentions through speeches and press conferences by its leadership ahead of policy meetings, aiming to avoid surprising markets. When senior officials such as the governor and deputy governors emphasise that inflation is near target and financial conditions remain loose, markets tend to interpret that as preparing the ground for further rate increases.

That approach reflects lessons from past episodes when unexpected policy moves caused sharp market swings. In August 2024, a rate increase combined with hawkish signals contributed to a sudden unwinding of yen carry trades that briefly sent global stock markets tumbling. Since then, the BOJ has been careful to communicate clearly and move gradually.

What comes next

The BOJ's October 30 policy meeting will be closely watched for signals on the timing of the next rate increase. Markets will look at updated economic forecasts and any guidance on the pace of tightening.

Himino's remarks suggest the central bank is comfortable continuing on its path. With underlying inflation near target and financial conditions still accommodative, the case for gradual rate increases remains intact, though the BOJ is likely to remain cautious given the risks to growth and markets. For investors, the BOJ's next steps will be a key influence on the yen, Japanese bond yields and global capital flows in the months ahead, with implications that stretch well beyond Japan's borders.