Bank of Japan's Himino signals readiness to raise borrowing costs

Deputy Governor Ryozo Himino signalled that the Bank of Japan is willing to keep raising borrowing costs. He said underlying inflation is close to the bank’s 2 per cent target, while financial conditions remain accommodative. That combination reduces the need for emergency support and increases the case for gradual policy tightening.

Himino pointed to still-low real borrowing costs and strong bank-lending growth. He argued that last month’s rate increase had not tightened conditions enough. He also warned that delaying necessary adjustments could allow inflation risks to grow and damage the economy over time.

The remarks strengthened market expectations of another increase as soon as December. The BOJ is expected to leave rates unchanged at its meeting ending October 30, but it may raise its inflation outlook for the next fiscal year and keep highlighting rising price risks.

Japan’s policy interest rate is 1.25 per cent. The article describes this as a 31-year high, meaning the rate has not been at this level for more than three decades. The figure matters because it shows the BOJ has moved well beyond its earlier highly supportive policy settings.

The bank raised the rate to 1.25 per cent last month. Despite that increase, Himino said real borrowing costs remain low and bank lending is still growing strongly. Those signs suggest the rate has not yet placed much restraint on households, companies, or credit activity.

The BOJ is therefore considering whether further increases are needed. It is expected to hold the rate at its meeting ending October 30, but market expectations point to a possible December move. Governor Kazuo Ueda is watching for evidence that financial conditions are approaching neutral levels.

Underlying inflation measures the broader direction of prices after temporary or one-off influences are removed. The Bank of Japan uses it to judge whether price growth reflects lasting economic pressure rather than a short-lived shock. This helps the bank decide whether monetary policy needs to change.

The BOJ’s target is 2 per cent inflation. Himino said underlying inflation is quite close to that level and is likely to converge toward a rate consistent with the target. He also said medium- and long-term inflation expectations continue to rise, which can make price increases more persistent.

The measure matters because inflation is coming from several sources. Fuel and raw-material costs are rising, while strong global demand for artificial intelligence is supporting exports and capital spending. Governor Ueda warned that Middle East tensions, a weak yen, and AI demand could push underlying inflation above 2 per cent.

Financial conditions describe how easy or difficult it is for households and businesses to obtain and use credit. The BOJ calls conditions accommodative when borrowing remains relatively inexpensive and loans continue to support economic activity. This matters because a policy rate can rise without immediately making the wider financial system restrictive.

Himino gave two concrete signs. Real borrowing costs remain low after adjusting for inflation, and bank lending is still growing strongly. Together, these indicators suggest that companies and households can continue accessing credit. The article therefore presents the latest rate increase as a limited tightening of actual financial conditions.

The BOJ uses these conditions to judge whether more rate increases are necessary. Governor Kazuo Ueda said the bank will look for changes that show how close the 1.25 per cent policy rate is to a neutral level. Himino argued that delaying adjustment could worsen inflation risks.

When a central bank raises interest rates, loans generally become more expensive and saving becomes more attractive. Households may delay purchases financed with credit, while businesses may postpone projects that depend on borrowing. These changes reduce demand across the economy, although the timing and size of the effect can vary.

For example, a company facing higher financing costs may reconsider a factory expansion or equipment purchase. A household may also reduce borrowing for a major purchase. With less spending and investment circulating, businesses may face less pressure to raise prices. The policy works through financial conditions rather than an immediate command over prices.

The BOJ is raising rates because it sees inflation risks from fuel and raw-material costs, a weak yen, Middle East pressures, and strong AI demand. However, it says conditions remain loose, so further increases may be needed to restrain demand and prevent inflation from overshooting 2 per cent.

Fiscal policy can work against higher interest rates when the government cuts taxes or increases spending. Tax cuts leave households or businesses with more money to spend. Larger public spending can also add demand directly. If supply does not expand equally, stronger demand can keep price growth elevated and make the BOJ’s task harder.

Prime Minister Sanae Takaichi’s tax-cut and big-spending plans were cited as possible obstacles to the BOJ’s anti-inflation effort. The government may also introduce electricity and gas subsidies during winter. Those subsidies would cushion households from rising heating bills, reducing their immediate financial burden even as energy prices increase.

Finance Minister Satsuki Katayama acknowledged that tax cuts generally push inflation higher by stimulating demand. She said the government would pursue fiscal policy that expands Japan’s supply capacity without accelerating inflation. The outcome will depend on whether added supply offsets the demand created by fiscal support.

A neutral interest rate is the estimated policy rate that neither boosts economic activity nor slows it. It is a benchmark rather than a directly observable number. If the policy rate is below neutral, monetary policy is generally considered supportive; if it is above neutral, it is generally considered restrictive.

The mechanism helps a central bank interpret a rate such as Japan’s 1.25 per cent policy setting. The BOJ can compare that rate with financial evidence, including real borrowing costs and bank-lending growth. If credit remains easy, the policy rate may still be below, or not far above, the level that restrains demand.

Governor Kazuo Ueda said the BOJ will scrutinise changes in financial conditions for clues about how close its rate is to neutral. That assessment will help determine whether another increase is needed. The bank is balancing persistent inflation risks against the danger of tightening too much.