At the news briefing that followed last month's policy meeting, Governor Kazuo Ueda said he would take into account the board's growing alarm over inflation risks in chairing future meetings. He also said the BOJ may accelerate rate hikes if financial conditions were deemed too loose.
The BOJ's recent communication highlights several factors that are likely increasing policymakers' alarm over the risk of an inflation overshoot.
Among them are growing signs of heightening inflation expectations with surveys suggesting those of households, firms and economists are all approaching or exceeding 2%.
Annual wholesale inflation remained elevated at three-year high levels in July, heightening the chance price pressures will spread to consumer goods as firms pass on higher costs.
Although the yen is off a 40-year low hit last month, its downtrend is likely to continue boosting import costs and prices for a broad range of goods, analysts say.
With underlying inflation nearing its 2% target, the BOJ must be particularly sensitive to upside price risks, a third source said.
As its policy rate approaches levels deemed neutral to the economy, the BOJ has stressed the need to carefully scrutinise the impact of past rate increases on the fragile economy before proceeding with the next hike.
Given heightening inflation risks, however, the BOJ may not want to wait too long in raising rates, the third source said.
The sources spoke on condition of anonymity as they were not authorised to speak publicly. The BOJ did not comment when contacted by Reuters.
Japan's joint intervention with the United States last month and a nudge from U.S. Treasury Secretary Scott Bessent have heightened attention to how the BOJ could respond to persistent yen weakness. Markets are now pricing in nearly an 80% chance of a rate hike in September.
Some analysts say a September rate hike would open scope for the BOJ to squeeze in another increase in December, which would heighten market views it could hike around once every quarter.
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