BOJ's Sato backs gradual rate hikes despite opposing Sept. increase

Bank of Japan policy board member Ayano Sato has indicated her support for gradually increasing the central bank's policy interest rate, signaling her openness to further hikes. This stance is a contrast to her previous opposition to a rate increase during the Bank of Japan's September policy meeting, where she, along with Toichiro Asada, voted against the hike.

Sato, who joined the BOJ board in June, expressed concern that consumer spending may weaken but refrained from commenting on the timing of the next rate hike. She emphasized that the timing of future rate increases should consider trends in private consumption and income. Sato suggested that higher interest rates can contribute to achieving sustainable economic growth.

The Bank of Japan last month raised its key interest rate to a 31-year high of 1.25 percent, suggesting that additional hikes may occur. Sato and Asada, both reflationists who favor monetary easing and aggressive fiscal spending, have sparked expectations of difficulties in future rate hikes, leading to yen selling against the U.S. dollar as investors anticipate a sustained gap between U.S. and Japanese interest rates.

The prime minister, Sanae Takaichi, who appointed Sato, has expressed caution about rate increases. Sato affirmed that the Bank of Japan should make policy decisions independently while ultimately aligning its policy with the government's expansionary fiscal stance. She highlighted that while private consumption momentum has been weak, she considered various data sources.

Sato also noted an increase in upside risks to inflation, citing Middle East instability and higher crude oil prices, while warning that strong artificial intelligence-related demand could weaken if major companies alter their moves. She cautioned that the economic outlook could shift sharply towards pessimism, and inflation could slow if the situation in the Middle East continues to deteriorate.