BOJ eyeing September rate hike, faster pace of tightening, sources say

The Bank of Japan (BOJ) is contemplating a September interest rate hike and is contemplating an accelerated pace of tightening, according to three sources familiar with its outlook. This move would signal the BOJ's growing concern over inflation pressures stemming from the Middle East conflict, robust demand for artificial intelligence, and the yen's persistent decline.

The BOJ previously raised rates in June to a 31-year high of 1%, but has not acted since exiting a decade-long stimulus program in 2024. The central bank is closely monitoring inflation expectations and recent data indicates that household, firm, and economist inflation expectations have climbed toward or surpassed the 2% target.

The yen's depreciation is also expected to boost import costs, further elevating inflation risks. While the BOJ maintains a cautious approach, it is prepared to accelerate rate hikes if financial conditions remain loose, potentially leading to a more frequent hiking schedule.