Bank of Japan (BOJ) Governor Kazuo Ueda reaffirmed on Tuesday the central bank’s willingness to raise interest rates further if underlying inflation nears its 2% target. Despite core consumer inflation remaining above 2% for three consecutive years, Ueda emphasized that demand-driven inflation still falls short of the BOJ's target.
To support inflation momentum, the BOJ is currently maintaining negative real interest rates. Ueda told parliament that as soon as there is stronger conviction that underlying inflation is approaching or stabilizing around the 2% mark, the central bank will take steps to gradually tighten monetary policy.
The BOJ ended its decade-long ultra-loose monetary policy last year and lifted short-term rates to 0.5% in January, signaling a shift toward policy normalization. However, external economic headwinds, including increased U.S. tariffs, have led the BOJ to revise its growth outlook downward, complicating the timing for future rate hikes.
While Ueda noted that further tightening remains on the table, he also highlighted the risks of returning to the zero lower bound. If Japan’s economy faces significant deflationary pressure, the BOJ could find itself with limited options to stimulate growth, given already low interest rates.
"It’s not something that could happen immediately," Ueda said, "but we must remain cautious of the risk, as future downturns could leave us with few tools."
Markets broadly expect the BOJ to hold interest rates steady at its upcoming June 16–17 policy meeting.