BoJ's Koeda: neutral rate well above 1%, and the Bank should not be overly cautious about hikes

Victoria Shinder15 October 2026, 07:082 min read

Bank of Japan Policy Board member Junko Koeda spoke to local leaders in Kumamoto on 15 October 2026. The message on rates was direct: given considerable upside risks to prices and still-accommodative financial conditions, the Bank "should not become overly cautious about raising the policy interest rate."

Where rates are. After the September 2026 hike, the uncollateralised overnight call rate has risen to around 1.25%, and long-term yields have been climbing along with rates abroad. Koeda judged that Japan's financial conditions remain accommodative overall: household mortgages are mostly variable-rate, but the working generation's wage growth and later accumulation of interest-earning assets mean higher rates are not necessarily expected to cut consumption; firms' funding conditions are favourable, and the main drag on investment plans has been surging construction costs, not interest rates.

The neutral rate. Koeda offered two ways to think about it. Adding the 2% price target to a slightly positive potential growth rate puts it above 2%. A mean-reversion view gives a lower number if the long zero-rate period dominates the sample, but that level has likely risen. Koeda's conclusion: the neutral rate is "considerably above 1 percent", roughly the lower bound of the Bank's estimated nominal range of about 1.1–2.5%.

Inflation. More than 70% of the over 500 CPI items are rising year on year, and the distribution of price changes has shifted right; together with stable wage gains, this suggests underlying inflation is becoming anchored at around 2%. Koeda named three lenses: AI, which is lifting demand and prices in the short run; geopolitical risk, with the yen no longer acting as a reliable safe haven and import prices pushed up; and natural-disaster and climate risk.

Balance sheet. Monthly JGB purchases are being cut by about ¥200 billion each quarter until March 2027 and will be held at about ¥2 trillion a month from April 2027, so redemptions will exceed purchases for years. Koeda said the size of the balance sheet "should not be underestimated."

Source: Bank of Japan, speech by Board Member Koeda in Kumamoto — http://www.boj.or.jp/en/about/press/koen_2026/ko261015a.htm