BOJ signals June rate hike to 1 percent, highest since 1995

Bank of Japan Governor Kazuo Ueda signaled on June 3 that the central bank stands ready to raise interest rates if upside risks to prices outweigh downside risks to economic activity, with markets currently pricing in roughly an 80 percent chance of a rate hike to 1 percent from the current 0.75 percent at the two-day policy meeting ending June 16. Three sources familiar with the BOJ's thinking indicated the bank is expected to proceed with the rate increase this month unless a sharp escalation in the Middle East conflict, particularly the renewed hostilities involving Iran, upends markets. A hike to 1 percent would bring Japan's policy rate to levels unseen since 1995. Ueda all but cemented expectations for a June rate hike in recent remarks, marking a clear narrative pivot toward inflation fighting and opening the door to more frequent increases in borrowing costs. Board members Kazuyuki Masu and Junko Koeda have warned of mounting price pressures, with at least three other hawks on the board already signaling support for raising rates as soon as June. A spike in wholesale inflation has alarmed policymakers over the fast pace at which companies are passing on costs, which is seen pushing consumer inflation above the BOJ's 2 percent target. Rising fuel costs from the Iran war have pushed bond yields to a near 30-year high, adding to the bank's inflation concerns. The BOJ exited a decade-long massive stimulus program in 2024 and has raised its policy rate several times since then, including in December, on the view that Japan was on the cusp of durably achieving its inflation target. Soaring energy costs from the Middle East conflict have complicated the bank's rate decisions, pushing up prices but also hurting an economy heavily reliant on fuel imports. The central bank will scrutinize developments in the Middle East and their fallout on Japan's economy until the last minute before reaching a final decision on June 16.