Bank of Japan Deputy Governor Ryozo Himino called Thursday for continued increases in the central bank’s key policy rate, highlighting risks to inflation from a weaker yen and other factors. Speaking at an event in Saitama, near Tokyo, Himino pointed to rising crude oil prices linked to the ongoing Middle East conflict, higher semiconductor costs driven by increased global demand for artificial intelligence technologies, and the recent depreciation of the yen as key inflationary pressures.

Himino emphasized the need to closely monitor upside risks to prices, stating that timely rate hikes would help prevent a rapid acceleration of inflation and avoid more abrupt policy tightening in the future. He suggested that such an approach would ultimately benefit small- and medium-sized businesses as well as mortgage borrowers.

Although he did not specify the timing or pace of the next rate adjustment, Himino noted that the Bank of Japan (BOJ) will assess inflation and economic indicators at each scheduled policy meeting, including the upcoming one on September 17-18. The remarks come amid growing market expectations of a rate increase at that meeting following the BOJ’s decision in June to raise its benchmark rate to 1.0 percent—the highest level in 31 years—and a subsequent pause in July.

Market anticipation for a September hike was further buoyed by comments from BOJ Governor Kazuo Ueda after the July meeting, when he suggested a willingness to accelerate the pace of rate increases if necessary. This signaled a shift from earlier forecasts that had expected rate hikes only once every six months, pointing to a potential move sooner than previously anticipated.

The recent weakness of the yen against the U.S. dollar has been a significant factor influencing inflation risks. In late July, Japanese and U.S. authorities conducted a rare joint intervention in currency markets to halt the yen’s decline, causing the currency to briefly strengthen from its 163.99 level—the weakest since 1986—to around 157. However, the yen has subsequently eased back to the 159 range in recent trading.

Market participants expect that a BOJ rate hike, combined with a possible delay in interest rate increases from the U.S. Federal Reserve, could narrow the interest rate gap between the two countries, leading to increased yen buying.

Himino acknowledged that while the BOJ’s monetary policy does not target exchange rates directly, the depreciation of the yen does influence economic activity and inflation. He noted that the pass-through effect from currency movements to domestic prices appeared to be strengthening, with potential impacts on inflation expectations. These considerations, he said, are important for the BOJ’s policy decisions as it seeks to maintain price stability and achieve its 2 percent inflation goal.

The yen’s decline has also raised concerns due to Japanese Prime Minister Sanae Takaichi’s expansionary fiscal policies and uncertainties over their funding, which may put further pressure on the currency and result in higher import costs, posing challenges for the broader economy.