# Bank of Japan's Koeda says the neutral rate is "considerably above 1%" and warns the board against excessive caution

She named AI demand, Middle East tensions and the weak yen as upside risks to prices, which keeps a move from the current 1.25% policy rate in play at the October 29-30 meeting.

- Published: 2026-10-16T05:18:24.267Z
- Canonical: https://polylog.news/2026-10-16/bank-of-japan-s-koeda-says-the-neutral-rate-is-considerably
- Publisher: Polylog (Global desk)
- Section: macro
- Sources: [The Japan Times (Business)](https://www.japantimes.co.jp/business/2026/10/16/economy/bank-of-japan-board-member-interest-rates/), [Bank of Japan](http://www.boj.or.jp/en/about/press/koen_2026/ko261015a.htm), [The Japan Times (Business)](https://www.japantimes.co.jp/business/2026/10/16/companies/sumitomo-life-target-acquisitions-southeast-asia/)

Junko Koeda, a member of the Bank of Japan (BOJ) policy board, told business leaders in Kumamoto that [the bank "should not become overly cautious about raising the policy interest rate"](http://www.boj.or.jp/en/about/press/koen_2026/ko261015a.htm). She said Japan's neutral rate, the level that neither stimulates nor restrains the economy, is [considerably above 1%](https://finance.yahoo.com/economy/policy/articles/boj-policymaker-warns-against-being-072915970.html). The current policy rate is 1.25%, so her estimate implies room for further increases.

Koeda gave three reasons for the inflation risk: strong global demand linked to AI, escalating tension in the Middle East and the weak yen. All three raise Japanese prices through the cost of imported raw materials. She also said that price rises across a wide range of consumer goods suggest underlying inflation is settling around the BOJ's 2% target. That is the condition the bank set for normalizing policy after decades of near-zero rates.

When reporters asked about a hike in October, she said she [had no specific pace in mind](https://www.japantimes.co.jp/business/2026/10/16/economy/bank-of-japan-board-member-interest-rates/). The board meets on October 29 and 30, when it will also publish new growth and inflation forecasts. Earlier this month, futures put the chance of an October hike at about 25%, according to [market reports after a speech by Governor Kazuo Ueda](https://www.fxstreet.com/news/the-japanese-yen-flatlines-through-a-boj-speech-that-changed-nothing-202610062233).

Japanese capital continues to leave the country while policy changes slowly. Sumitomo Life is [considering acquisitions in Southeast Asia and the United States](https://www.japantimes.co.jp/business/2026/10/16/companies/sumitomo-life-target-acquisitions-southeast-asia/) to diversify its income against a shrinking home market. Policy rates that stay low relative to inflation make domestic returns less attractive to savers and insurers, which pushes Japanese money abroad and keeps pressure on the yen.

## What this means

The channel is the gap between US and Japanese rates. That gap keeps the yen weak and makes the yen a cheap currency to borrow in order to buy higher-yielding assets abroad. A hawkish BOJ narrows the gap from the Japanese side, while a possible Fed hike widens it from the US side. The exposed groups are investors who fund overseas positions in yen, Japanese insurers deciding whether to bring money home, and global long-term bond markets that Japanese buyers have supported. The market has priced a slow BOJ. The new element is a board member openly arguing that delay is the larger risk. The precedent is the BOJ's July 2024 hike, which was followed on August 5, 2024 by a one-day fall of more than 12% in the Nikkei as yen-funded positions were closed. The likelier outcome is that the October outlook report raises the bank's price forecasts and the board raises rates at that meeting or the following one. That depends on the AI-led sell-off in Asian equities not deepening into a broader funding stress. It would be proved wrong if the board cites market turmoil or a stronger yen as a reason to wait into next year.

## What to watch

- The BOJ's October outlook report forecast for core inflation. An upward revision would give the board its stated justification for a hike.
- The yen's moves against the dollar after US data releases. A falling yen despite hawkish BOJ comments would show that the Fed is setting the terms.
- Further overseas acquisitions by Japanese insurers. More deals would show domestic institutions still see better returns abroad than at home.