A Prelude to the Bank of Japan's Interest Rate Hike? Kazuo Ueda Calls for Vigilance Against Food Inflation Risks

On Tuesday this week, Kazuo Ueda, Governor of the Bank of Japan (BOJ), stated at a conference hosted by the BOJ that Japan's underlying inflation may have approached the central bank's 2% target, and that the BOJ must remain vigilant about the risk that rising food prices could push up underlying inflation.

Against the backdrop of most outside economists speculating that the BOJ might raise interest rates before the end of the year, Ueda's remarks were interpreted by the outside world as a signal that the BOJ is preparing to continue raising interest rates.

Rising Food Prices in Japan Push Up Underlying Inflation

In his speech, Ueda noted that although Japan's inflation expectations (i.e., the public's views on future price trends) stood between 1.5% and 2%, reaching their highest level in 30 years, they remained below the BOJ's 2% target, prompting the BOJ to maintain interest rates at low levels.

However, he also mentioned that renewed increases in food prices—particularly a 90% surge in rice prices—have not only pushed up headline inflation but also underlying inflation.

"Our baseline view is that the impact of rising food prices is expected to moderate going forward," he said. "However, given that underlying inflation is closer to 2% than it was a few years ago, we need to be cautious about how rising food prices will affect underlying inflation."

The latest data released last Friday showed that Japan's core inflation rate accelerated to 3.5% in April, with rice prices rising 98.4% YoY, marking the largest increase since comparable data became available in 1971 and the seventh consecutive month of record-breaking increases.

Japan Expected to Raise Interest Rates Again Before Year-End

Ueda's remarks came as the BOJ is closely monitoring the economic risks posed by the US tariff hikes and domestic inflationary pressures to determine when to resume interest rate hikes.

Ueda stated that although the BOJ has revised down its economic forecasts due to uncertainties surrounding trade policies, he expects that Japan's underlying inflation will gradually move toward the 2% target by the end of fiscal 2027 (before the end of March 2027).

He said that with improvements in economic activity and prices, "to a certain extent, upcoming data will increase our confidence in the baseline scenario, and we will adjust the degree of monetary easing as needed (through interest rate hikes)."

Last year, the BOJ ended its decade-long massive easing program and raised short-term interest rates to 0.5% in January this year.

Although the BOJ has indicated its readiness to raise interest rates further, uncertainties stemming from the US tariff hikes have forced it to revise down its economic growth forecasts for Japan, complicating the BOJ's decision-making on the timing of the next interest rate hike.

According to media surveys, most economists currently expect the Bank of Japan to keep interest rates unchanged until September this year, but it is highly likely that interest rates will be raised again from October to the end of the year.