By Megumi Fujikawa

TOKYO--The Bank of Japan may consider monetary tightening if a surge in food prices causes broader and stronger inflation, the central bank governor said Wednesday, adding fuel to expectations for a near-term rate hike.

"We may have to consider responding by raising interest rates if the rise in some food prices gradually spreads to related prices such as processed food products and restaurants, which would make it easier to raise prices for other goods and services and lead to the possibility for more widespread inflation," BOJ Gov. Kazuo Ueda told a parliamentary committee.

But if food inflation is only temporary, the central bank shouldn't respond with monetary policy, he said, adding that he expects cost-push factors to fade away eventually.

Consumer inflation has been running above the BOJ's target of 2% for almost three years. Recent price increases are led partly by higher food prices, including those for rice, a key staple food in Japan, which have marked a record increase.

The comments came amid growing concerns that the spike in the costs of daily essentials may hurt sentiment among Japanese consumers even further. Higher food prices have already forced some companies to raise price tags on their products.

The 7-Eleven convenience-store chain in Japan has decided to increase prices for rice products, including onigiri rice balls and bento lunch boxes. The company said it made efforts to improve productivity but was unable to avoid the price hikes due to the rising costs of ingredients, packaging materials and logistics.

Despite inflationary pressure, the BOJ maintained its policy rate at 0.5% last week, as it examines the effect of the January hike. The BOJ governor has also become more cautious about uncertainties surrounding the economic outlook, including the impact of U.S. trade policy--which Ueda said could affect confidence among businesses and households, in addition to the direct effects on trade activity.

Economists and market players still expect the BOJ to make another rate increase in the near future. But some say the central bank should be more careful about the next move as interest rates are approaching a level not seen in the past three decades.

On Wednesday, Ueda reiterated that underlying inflation, which excludes temporary and volatile factors, remains slightly below the BOJ's target, but the so-called deflationary mindset among the Japanese public, a belief that prices and wages won't increase, has been changing.

"We are one step away from creating a virtuous cycle" of income, spending and inflation, Ueda said. In an encouraging sign for the positive trend, Japanese companies have promised to give the biggest pay increases in 34 years.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

(END) Dow Jones Newswires

March 26, 2025 00:50 ET (04:50 GMT)

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