Bank of Japan Deputy Governor Ryozo Himino delivered a hawkish assessment of Japan's economic outlook on Thursday, telling local business leaders in Saitama that the central bank should continue raising its policy interest rate and adjusting the degree of monetary accommodation in line with developments in economic activity, prices and financial conditions.

Himino said accommodative monetary conditions remain positive for the economy, but reiterated that the BOJ should continue raising the policy rate and adjusting the degree of accommodation as conditions warrant. As one of the BOJ's two deputy governors, Himino is among the officials whose speeches are closely watched for signals of the board's thinking between policy meetings. The central bank ended eight years of negative interest rates in March 2024, its first increase in 17 years, and has been tightening in small steps since, gradually unwinding decades of aggressive stimulus.

He said the bank must be mindful of upside price risks more than ever before and should pay greater attention to those risks than it has in the past, a notable shift for a central bank that spent much of the past decade trying to push inflation up to its target rather than cap it. He said it is important to stabilize underlying inflation at a level around the BOJ's 2% target, warning that a deviation above that level would have an adverse impact on the economy.

He added that the board will debate policy at each meeting with these considerations in mind, though he cautioned that monetary policy takes time to work through to prices, drawing a comparison to a bus whose speed changes only gradually in response to the accelerator and brake.

On the drivers of inflation, Himino pointed to two forces working in the same direction. Rising global AI-related demand is pushing up both economic activity and prices, he said, pointing to Japanese export price gains concentrated in memory chips, precision instruments and semiconductor manufacturing equipment, with spillover effects reaching sectors as varied as copper mining and inbound tourism. Japan is home to some of the world's largest suppliers of chipmaking equipment and materials, which is why the AI boom shows up directly in the country's export prices.

Separately, he said yen depreciation, which raises the cost of imports, is also working to push inflation higher, even as accommodative financial conditions continue to provide broad support to the economy.

Himino also addressed the Middle East conflict, one of the four key factors he identified as shaping the current outlook alongside AI demand, the yen and financial conditions. Japan imports nearly all the crude oil it consumes and has historically relied on the Middle East for the bulk of that supply, making the conflict a longstanding vulnerability for the economy. He said earlier concerns over supply chain disruption have significantly diminished, noting that Japan had secured close to 100% of its required crude oil through alternative procurement channels by July, including a sharp increase in sourcing from the United States.

Still, he noted the conflict continues to exert downward pressure on economic activity while pushing prices upward, alongside a renewed escalation in tensions during July.

Taken together, the speech reinforces the picture of a BOJ board increasingly focused on the risk of inflation running persistently above target, rather than the risk of a premature tightening derailing the recovery, a shift in emphasis that is likely to keep alive market expectations for further policy rate increases in the months ahead. The next indications of how firmly that emphasis has taken hold will come at the BOJ's upcoming policy meetings and in its quarterly Outlook Report, alongside wage data and next spring's shunto pay negotiations, which Governor Kazuo Ueda has repeatedly said are key to keeping inflation sustainably at target.