Bank of Japan board members called for a close watch on upside risks to their inflation outlook amid labor shortages and higher import costs, with a majority seeking to justify a follow-up interest rate hike by pointing to low borrowing costs in real terms, according to the summary of the bank's July 30-31 meeting.

But a few members urged a more cautious approach, saying the consumer spending remained sluggish amid more than two years of falling real wages, which would require confirmation of spreading substantial wage hikes in hard data.

One member estimated that the bank's policy rate that is considered neutral to economic activity should be"around 1 percent at the lowest" -- what market participants call the terminal rate in the current gradual process of normalizing monetary policy after a decade of large-scale easing. The board expects the bank's 2 percent price stability target will be achieved in the second half of fiscal 2025 (ending March 2026). To avoid rapid hikes in the policy rate, the same member said,"the bank needs to raise the policy interest rate in a timely and gradual manner, while paying attention to how the economy and prices respond."

Governor Kazuo Ueda told reporters on July 31 that a"gradual" pace of rate hikes at an early stage is better than jacking up interest rates later when upside risks to inflation materialize. He had also said the main tool is the change in the short-term interest rate and not the change in the amount of government bonds that the bank buys.

Several board members noted that easy money conditions would continue."Real interest rates are at their most negative levels in the past 25 years, and the degree of monetary accommodation, based on various indicators, has been significantly above its average during the period of quantitative and qualitative monetary easing (QQE)," one member said.

Another member agreed:"Even if the bank raises the policy interest rate, the nominal interest rate will continue to be at a highly accommodative level of 0.25 percent, and there is no change in the bank's stance to firmly support the economy." A third member noted that raising the rate"at a moderate pace" means an adjustment in the degree of monetary accommodation in accordance with underlying inflation,"which will not have monetary tightening effects."

Among cautious views, one member said the board needs to"more carefully assess how the economic situation has improved with wage hikes becoming widespread, based on relevant data, as there are many datasets showing somewhat weak developments in, for example, the economic growth rate and private consumption."

Another one argued that"there is little data confirming sustainable growth in Japan's economy at this point," thus calling on the board to decide on changing the guideline for money market operations after assessing key economic data at the next meeting on Sept. 19-20.

At the July meeting, the nine-member board decided in a 7 to 2 vote to raise the overnight interest rate target to 0.25 percent from a range of 0 percent to 0.1 percent, citing gradually rising inflation expectations among households and businesses and high but slightly easing uncertainties for the economy. The board decided in a unanimous vote to start reducing the pace of its purchases of Japanese government bonds (JGBs) gradually to around ¥3 trillion in the January-March quarter of 2026 from about ¥6 trillion now. In principle, it will reduce the pace by roughly ¥400 billion every quarter. The bank will review the process at its June 16-17, 2025 meeting and"may modify the plan as appropriate, if deemed necessary after reviewing the developments in and functioning of the JGB markets."

The summary of the Bank of Japan's July 30-31 meeting is expected to show board members who were believed to have a neutral policy stance agreed to the upside risks to the board's inflation outlook that had been emphasized by a few hawkish voices while a couple of known doves remained more cautious about raising rates now before confirming that high wage hikes at large firms are spreading to smaller firms in hard data.

The nine-member board decided in a 7 to 2 vote to raise the overnight interest rate target to 0.25 percent from a range of 0 percent to 0.1 percent, citing gradually rising inflation expectations among households and businesses and high but slightly easing uncertainties for the economy. It also warned of upside risks to its GDP and CPI forecasts, specifically pointing out that the impact of currency market fluctuations on domestic prices is greater than in the past now that more firms are reflecting higher costs in prices and raising wages amid widespread labor shortages.

Whether the bank will raise rates again this year, Governor Kazuo Ueda said, will depend on upcoming data including the effects of two rate hikes. He told reporters that a"gradual" pace of rate hikes at an early stage is better than jacking up interest rates later when upside risks to inflation materialize.

The Bank of Japan releases the Summary of Opinions expressed by its nine policy board members six business days after each Monetary Policy Meeting.

The BoJ holds eight MPMs a year, in January, March, April, June, July, September, October and December. The BoJ began publishing the summary in 2016 to provide a brief look at what was discussed at the latest meeting as part of its efforts to increase the transparency of the conduct of monetary policy. The governor of the bank holds a news conference at 1530 JST (0630 GMT), a few hours after the release of the monetary policy statement, to discuss the board's policy decision and assessment of the economic and financial conditions. More details become available when the summary is published. Before 2016, market participants had to wait until the release of the minutes, which comes a month or two after the meeting because the board must approve the minutes at the following meeting before its release. The summary is edited by the governor and does not require the board's approval.