Bank of Japan board members said the impact of rising crude oil prices was already spreading to midstream business-to-business prices and warned that this could affect prices of a wider range of consumer items.
"In this situation, more concern is warranted about the risk that this could lead to a rise in prices, given that firms' price-setting behavior is becoming more active," according to a summary of opinions from the June 15-16 Monetary Policy Meeting released Wednesday.
At the meeting, the board voted 7-1 to raise the policy interest rate by 25 basis points to 1.00%, the highest level since 1995.
The board cited the risk that underlying CPI inflation could deviate upward to a level about the 2% price stability target. The decision marked the BOJ's first rate hike since December, when the board lifted the rate to 0.75% from 0.5%.
Members also pointed to the rise in inflation expectations, as indicated by the break-even inflation rate and the widening spread between short- and long-term interest rates.
"Import prices have also been driven up by exchange rate developments. Such price increases are considered to place a burden on the business of a considerable number of firms, including small and micro firms," according to the minutes.
The board said it had become "more appropriate than before" to adjust the degree of monetary accommodation.
Members added that even if crude oil prices dropped in the future, it was "highly possible" that upward price deviation would spill to items other than petroleum-related goods.
The board said this reflects demand shocks stemming from overseas developments, particularly the global expansion of AI-related demand.
Japan's annual headline inflation rose to 1.5% in May from 1.4% in April, while core inflation, which strips out volatile items, held steady at 1.4%.
"Government measures have the effect of influencing households' perceived inflation by adjusting the price levels of specific goods and services," according to the June minutes.
However, the board noted that such factors need to be excluded when assessing underlying inflation levels.
Beyond rates, the board agreed to halt the reduction of its Japanese government bond purchase amounts from April 2027.
The board acknowledged that it will likely take some time for Japanese investors to beef up their government bond holdings.
Additionally, the board said Japan's economy has been developing in line with the baseline scenario according to the April 2026 Outlook for Economic Activity and Prices.
The BOJ expects Japan's real GDP to grow by about 0.5% in fiscal 2026, according to the April outlook.
"[T]he projected real GDP growth rate for fiscal 2026 is lower, and the projected year-on-year rate of increase in the CPI (all items less fresh food) for fiscal 2026 is significantly higher, both reflecting the rise in crude oil prices," the BOJ said at the time.
Meanwhile, ING Think Senior Economist Min Joo Kang said they expect a majority of BOJ board members to support another rate hike if geopolitical risks to growth subside further.
"[T]he timing of the next rate hike will likely depend on how quickly energy supply disruptions are resolved. The focus seems to be on the possible impact on growth rather than on inflation," the economist said.