BOJ's debate on faster hikes bolsters September rate move odds

The opinions align with BOJ Governor Kazuo Ueda's hawkish communication after the July meeting and indicate how support for faster rate hikes was spreading beyond two vocal hawks - Naoki Tamura and Hajime Takata - in the nine-member board. Sources have told Reuters that a recent joint Japan-U.S. yen intervention and comments from Bessent signalling his desire for an early rate hike have all but locked in a September rate hike. The BOJ lined up three speaking events from its board members ahead of its September meeting, which could offer potential clues on whether it is preparing to raise rates next month. The central bank ended a decade-long, massive stimulus in 2024 and raised its policy rate roughly twice a year, including in June, when it took it to a 31-year high of 1%. Yet the rate remains well below those of other major central banks, and real borrowing costs are still negative with inflation holding around the BOJ's 2% target for four years. Critics say the BOJ's cautious pace of rate hikes contributed to the yen's slide to a 40-year low, driving up import costs and weighing on households and retailers. Most analysts polled by Reuters expect the central bank to raise rates again to 1.25% by year-end. Some members called for faster rate hikes, and many saw the need for more vigilance to inflation risks, according to a summary of opinions at the Bank of Japan's July meeting. The summary showed that at least three of the board's nine members said the BOJ could raise rates more quickly than its current pace of roughly two increases a year, highlighting growing alarm that the bank risks falling behind the curve on inflation. The hawkish tone reinforces market expectations that the BOJ could raise rates as soon as September, following a nudge from U.S. Treasury Secretary Scott Bessent and joint intervention by Tokyo and Washington to prop up the yen, analysts say. Having just raised interest rates in June, the BOJ kept policy steady at the two-day meeting ending on July 31 but strongly signalled a near-term increase. At the meeting, many saw the need to focus more on the risk of underlying inflation overshooting the BOJ's 2% target, as rising import costs from the weak yen and price pressures from strong AI demand add to high fuel costs from the Middle East conflict, the summary showed. "Given we must pay attention to the risk of an inflation overshoot more than before, the pace of rate hikes could be faster than markets expect," one member said. Another member said the focus of monetary policy has shifted away from efforts to push up underlying inflation to the BOJ's target of 2%, towards preventing it from overshooting. "The risk of waiting is no longer marginal. We must accelerate the pace of adjustment to the degree of monetary accommodation," the member said, calling for a faster pace of rate hikes. A third opinion said the BOJ should avoid committing to a fixed pace of rate hikes and instead "clearly demonstrate to markets its determination to prevent upward deviation in prices." Several other members also called for a nimble approach to raising rates, with some citing heightening inflation expectations and still-accommodative financial conditions, the summary showed.

BOJ's debate on faster hikes bolsters September rate move odds

Signs point to a possible September move

Policy remains far below other major central banks

July summary shows growing support for faster rate hikes

Members warn about inflation overshoot and slower action

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