By Leika Kihara
Oct 15 (Reuters) - The Bank of Japan should not become overly cautious about raising interest rates given considerable upside risks to inflation, its board member Junko Koeda said on Thursday, signalling the chance of a near-term hike in borrowing costs.
A former academic, Koeda also said she saw Japan's neutral interest rate, or the level that neither cools nor overheats economic growth, "considerably above 1%," suggesting scope for further hikes in the BOJ's policy rate from the current
1.25%.
The remarks came ahead of the BOJ's next policy meeting on October 29 and 30, where the board will release fresh growth and inflation forecasts that markets will scrutinise for signals on the timing of the next rate hike.
Koeda said strong global AI demand, escalating Middle East tensions and the weak yen were all working to push up domestic prices through higher raw material costs.
The economy has shown resilience to recent external shocks, such as higher US tariffs and the Middle East war, she said.
"This prompts me to place greater emphasis on upside risks to prices," Koeda said, adding that continued price rises across a wide range of consumer items suggested that underlying inflation is becoming anchored at around the BOJ's 2% target.
She also said Japan's financial conditions remain accommodative even after the central bank's past interest rate hikes, with little sign higher borrowing costs were hurting household and business activities.
"The BOJ should adjust interest rates in a timely manner with an eye on the economic and price situation, while keeping in mind the estimated range of the neutral interest rate," she said in a speech delivered to business leaders in Kumamoto, southern Japan.
"Given that there have been considerable upside risks to prices in addition to continued accommodative financial conditions, the BOJ should not become overly cautious about raising the policy rate."
The BOJ raised its key rate to a 31-year high of 1.25% last month, and signalled a shift toward preventing underlying inflation from overshooting its target, bolstering expectations of further policy tightening.
While the BOJ may pause in October, it is likely to drop hawkish hints that would reinforce dominant market expectations of a December hike, sources have told Reuters.
The BOJ's September rate hike has intensified focus on Japan's neutral interest rate as markets gauge how much further policymakers can raise borrowing costs.
Its staff has produced estimates suggesting Japan's nominal neutral rate stood in a range between 1.1% and 2.5%. But the central bank has cautioned against treating the range as definitive, noting that the neutral rate is unobservable and highly sensitive to the assumptions and data used to estimate it.
(Reporting by Leika Kihara; Editing by Jacqueline Wong and Shri Navaratnam)
