The Bank of Japan closely monitors the risk of inflation overshooting, signaling a faster rate hike internally.

⑴ Three sources familiar with the Bank of Japan's thinking revealed that the Bank of Japan remains highly vigilant about upside inflation risks that could lead to a faster pace of rate hikes than the market expects, and has internally discussed relevant scenarios.⑵ Most policy committee members believe the pace and timing of rate hikes cannot be predetermined and depend entirely on the evolution of the economy and prices at the time, but some see room to act faster than the mainstream twice-per-year schedule if a weak yen and continued fuel cost increases persistently push prices higher.⑶ Companies are passing on rising costs at a fairly steady pace, and inflation expectations are rising in tandem. This has become a key factor in policy-making, according to sources. The breadth and extent of corporate price adjustments in the summer will determine whether conditions for action exist at the September and October meetings.⑷ Although the risks of slower growth and significant overshooting of inflation, as warned in the April report, have eased, the possibility of inflation overshooting still exists. The main reason is that the weak yen is speeding up the transmission of higher import costs, and robust global demand for AI continues to drive up metal and semiconductor chip prices, which could in turn push up prices for a wide range of consumer goods.⑸ At next week's meeting, where the interest rate is expected to remain unchanged at 1%, the central bank will issue new quarterly forecasts. Given that underlying inflation is approaching 2%, even moderate inflation risks may hold greater importance when considering the timing of a rate hike. At the same time, external pressure from the yen hovering at a forty-year low may force the central bank to send a more hawkish policy signal.