BOJ board member Koeda said underlying inflation is already around 2% and the central bank needs to continue raising rates, warning that Middle East developments may push inflation above target looking ahead.

Summary:
All bullets per BOJ board member Koeda’s public remarks, 20 May 2026:

• Underlying inflation is assessed to be already around 2%, with some possibility it could exceed that level given the Middle East situation
• The BOJ needs to continue raising the policy interest rate at an appropriate pace, balancing inflation concerns against economic trade-offs
• Developments over the past one to two months have increased the likelihood of a risk scenario in which high crude oil prices persist
• Both survey-based and market-based indicators of long-term inflation expectations have already risen slightly, which Koeda said warrants attention
• If real interest rates continue to deviate markedly in a negative direction from the natural rate, unintended distortions in future resource allocation could arise
• The BOJ’s approach to policy normalisation will depend on factors including the size of the output gap and the stability of the natural rate of interest
• If the economy avoids a major downturn, Koeda said more attention needs to be paid to the side effects of a further decline in real interest rates

Bank of Japan board member Koeda delivered a firmly hawkish assessment of Japan’s inflation outlook on Wednesday, saying underlying price growth has already reached around 2% and arguing that the central bank needs to press ahead with further interest rate increases to address the risk of inflation becoming entrenched.

Speaking publicly, Koeda said the BOJ needs to continue raising the policy rate in response to developments in economic activity, prices and financial conditions, framing the case for tightening not as a question of whether but of pace and timing. The comments arrive a day before Japan’s April nationwide CPI release and sharpen the focus on the BOJ’s June meeting considerably.

On the inflation outlook, Koeda’s assessment was notably direct. Underlying inflation is already around 2%, he said, and given the situation in the Middle East, there is some possibility it could move above that level in the period ahead. He noted that developments over the past one to two months have increased the likelihood of a risk scenario in which elevated crude oil prices persist, with supply and demand dynamics suggesting price pressures could broaden across a wider range of goods and services. Both survey-based and market-based indicators of long-term inflation expectations have already edged higher, a development he said warrants close attention.

The real interest rate argument Koeda advanced was perhaps the most technically pointed element of his remarks. If the BOJ does not adjust its policy rate in response to rising inflation or inflation expectations, short-term real rates will fall further into negative territory, he said. Should that deviation from the natural rate of interest persist and widen, unintended distortions in future resource allocation become a material risk, an argument that reframes inaction as a policy choice with its own costs rather than a neutral holding position.

Koeda acknowledged the trade-offs involved, noting that the BOJ’s approach to normalisation will depend on factors including the size of the output gap and the stability of the natural rate. But the overall thrust was clear: absent a major economic downturn, the side effects of declining real interest rates demand increasing attention, and the case for continued tightening remains intact.