Minutes from the Bank of Japan's April policy meeting showed several board members were increasingly concerned about upside inflation risks, with some arguing interest rates should be raised immediately as higher energy prices threatened to push inflation above target.
At the April 27-28 meeting, the BOJ voted 6-3 to keep its policy rate at 0.75%, though three members proposed raising it to 1.0%.
The minutes showed policymakers growing more concerned that higher crude oil prices linked to tensions in the Middle East could spill over into broader price pressures.
One member warned that "risks to prices were skewed to the upside under accommodative financial conditions," while another argued that "the price stability target had been more or less achieved."
Several members said firms had become more willing to pass rising costs on to consumers, increasing the risk that inflation could exceed the BOJ's projections.
"It was highly likely that firms would start passing on to selling prices not only cost increases stemming from the current rise in crude oil prices, but also past increases in personnel costs," the minutes showed.
Some policymakers also expressed concern that inflation expectations were becoming more entrenched.
"There was concern over the risk of medium- to long-term inflation expectations and the underlying inflation rate rising above 2 percent," the minutes said.
While members agreed Japan's economy was recovering moderately, they noted growing uncertainty stemming from the situation in the Middle East.
The board said the economy was likely to continue growing moderately, albeit at a slower pace, supported by strong corporate profits, improving employment and income conditions, and government measures to reduce the burden of higher energy costs.
The discussion foreshadowed the BOJ's decision on Tuesday to raise its policy rate by 25 basis points to 1.0%, the highest level since 1995.
The decision was approved by a 7-1 vote.
Governor Kazuo Ueda missed the meeting due to a two-week hospital stay for an infected liver cyst, with Deputy Governor Shinichi Uchida standing in at the post-meeting briefing and reaffirming the BOJ's tightening bias.
"Regarding the question of falling behind the curve, our basic approach is to continue raising policy interest rates while adjusting the degree of monetary easing," Uchida said.
At that meeting, the central bank warned that higher crude oil prices were increasingly being passed through to businesses and could spread to consumer prices across a broad range of goods, creating a risk that underlying inflation could rise above its 2% target.
The BOJ also signaled that further rate increases remain under consideration, saying it will continue to adjust the degree of monetary accommodation in response to developments in economic activity and prices.
The central bank added that it would closely monitor the impact of the conflict in the Middle East on Japan's economy and inflation outlook when determining the timing and pace of future policy adjustments.
