By Leika Kihara
FUKUI, Japan, Sept 10 (Reuters) - The Bank of Japan may eventually be forced to raise interest rates rapidly if inflation accelerates given the country's loose financial conditions, board member Kazuyuki Masu said, warning of price risks that solidify the chance of a September hike.
In a closely watched speech ahead of next week's policy meeting, Masu gave no specific hints on the pace and timing of future rate hikes, but warned of broadening price pressures that have pushed underlying
inflation "very close" to its 2% target.
He also said the BOJ must pull real interest rates out of negative territory as soon as possible, signalling his concern over the demerits of too-low borrowing costs.
A recent spike in producer prices warrants attention, as it could push up consumer inflation more than in the past, with companies actively passing on higher costs from the Middle East conflict and the weak yen, Masu said on Thursday.
Rising fuel and chemical prices from the war in Iran could push up transportation costs which, coupled with rising food prices, could have a lasting effect on overall prices, he said.
"Financial conditions in Japan remain accommodative. If inflation accelerates here, there is a risk we might inevitably need to rapidly raise interest rates," Masu said in a speech.
In continuing with its rate-hike path, what was most vital was to ensure underlying inflation does not significantly exceed 2%, he added.
"I am convinced the BOJ needs to raise its policy rate further as it falls solidly within the estimated range of the neutral interest rate, thereby ensuring the flexibility needed to swiftly adjust the policy rate in either direction, depending on economic conditions," he said on its policy normalisation.
The yen rose against the dollar after the remarks by Masu, who is seen by markets as among those in the nine-member board holding a neutral to somewhat hawkish view on monetary policy.
His remarks add to a slew of hawkish BOJ commentary and pressure from U.S. Treasury Secretary Scott Bessent that have cemented views the BOJ will raise interest rates this month.
Analysts polled by Reuters expect the BOJ to hike rates to 1.25% next week and then to 1.75% in the second quarter of 2027, earlier than previously thought, amid persistent concerns over broadening price pressures and yen weakness.
With a rate hike next week nearly fully baked in, markets are focusing on any clues from policymakers on whether the BOJ could speed up rate hikes from the pace so far of roughly twice a year.
Masu said only the timing and pace would depend on the likelihood of the economy achieving the BOJ's baseline scenario as well as risks such as price pressures from rising oil costs, solid AI-related demand and yen moves.
But he said there was no indication recent rate hikes have dampened firms' appetite for funding, warning instead of concerns over "potential overheating" in corporate investment.
The BOJ raised interest rates to a 31-year high of 1% in June on the view Japan was on the cusp of durably hitting its 2% inflation target. It kept rates steady in July but signalled a strong chance of a near-term hike on mounting price pressures from the Middle East war and a weak yen.
Annual wholesale inflation remained elevated at three-year high levels in July, heightening the chance price pressures will spread to consumer goods as firms pass on higher costs. The BOJ will release on Friday wholesale inflation data for August.
Sources have told Reuters the BOJ is set to raise rates as soon as September and is considering hiking more aggressively thereafter.
BOJ staff has produced estimates showing Japan's nominal neutral rate, or the level that neither cools nor overheats growth, to be in a range of 1.1% to 2.5%.
(Reporting by Leika Kihara; Editing by Thomas Derpinghaus and Kim Coghill)
