Bank of Japan board member Junko Koeda said on Thursday the central bank should raise interest rates at an "appropriate pace" as underlying inflation may exceed its 2% target due to the prolonged conflict in the Middle East.
"Given the situation in the Middle East, I see some possibility that underlying inflation may exceed 2% looking ahead," Koeda said in a speech, adding that recent slight rises in long-term inflation expectations warranted attention.
"I believe it's reasonable to raise the policy interest rate at an appropriate pace to address high inflation while also considering the trade-offs for the economy," she said.
Koeda said the BOJ must be mindful of the demerits of keeping real interest rates well below levels deemed neutral to the economy, such as causing unintended distortions in future resource allocation.
Given Japan's positive output gap and strong global IT demand, Japan's economy is likely to avert a major economic downturn in coming years, Koeda said. "If the economy does not see a major downturn, more attention must be paid to the side-effects of a further decline in real interest rates," she added.
