The case for the Bank of Japan to raise interest rates as soon as September has strengthened, with a growing number of policymakers calling for a faster response to mounting inflation risks, according to a summary of opinions from the central bank’s July meeting released on Monday, Reuters reported.
At least three of the Bank of Japan’s nine board members indicated that interest rates could be raised more quickly than the current pace of roughly two increases a year. The comments underscore growing concern within the central bank that monetary policy could fall behind rising price pressures.
The more hawkish tone of the summary has reinforced market expectations of a September rate increase. Analysts said expectations have also been supported by recent signals from US Treasury Secretary Scott Bessent and joint Japan-US intervention aimed at supporting the yen.
Inflation risks gain greater attention
The BOJ kept its policy rate unchanged at its July 30-31 meeting, after raising rates in June. However, the latest summary suggests policymakers are becoming increasingly focused on the possibility that inflation could overshoot the central bank’s 2% target.
According to the summary, many board members saw a need to pay greater attention to inflation risks stemming from the weak yen, higher import costs and price pressures linked to strong demand for artificial intelligence-related products. Elevated fuel costs associated with the conflict in the Middle East were also seen as a potential source of additional inflationary pressure.
One member indicated that the pace of rate increases could exceed market expectations as the risk of inflation moving above target becomes more significant.
Another policymaker said the focus of monetary policy had shifted from encouraging underlying inflation towards the 2% target to preventing inflation from overshooting it. The member argued that the risks of waiting had become more significant and that monetary accommodation should be reduced more rapidly.
A third policymaker urged the BOJ to avoid committing to a predetermined pace of rate increases, while emphasising the need to clearly demonstrate its determination to prevent inflation from moving persistently above target.
Several other members also supported a flexible approach to monetary tightening, pointing to rising inflation expectations and financial conditions that remain accommodative.
September decision comes into focus
The views suggest that support for a faster tightening cycle is spreading beyond the BOJ's two prominent hawkish members, Naoki Tamura and Hajime Takata.
Reuters has previously reported, citing sources, that recent coordinated Japan-US intervention in the currency market and Bessent's comments favouring an early Japanese rate increase have strengthened expectations of a September hike.
The BOJ has scheduled three speaking events involving board members before its September policy meeting. Investors are expected to closely monitor those appearances for indications of whether the central bank is preparing markets for another rate increase.
The BOJ ended a decade of massive monetary stimulus in 2024 and has since raised its policy rate roughly twice a year. The June increase lifted the rate to 1%, its highest level in 31 years.
Despite the tightening cycle, Japanese borrowing costs remain considerably lower than those of other major economies, while real borrowing costs are negative. Inflation has remained around the BOJ's 2% target for roughly four years.
Critics have argued that the BOJ's cautious pace of normalisation contributed to the yen's decline to a four-decade low, increasing import costs and putting additional pressure on households and retailers.
Most economists polled by Reuters expect the BOJ to raise its policy rate to 1.25% by the end of the year, making the timing of the next increase a key focus for currency and bond markets.
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