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

The Bank of Japan is reportedly considering raising interest rates as early as September, with sources indicating a potentially more aggressive tightening strategy moving forward. This move would coincide with concerns over rising price pressures stemming from the Middle East conflict, robust global demand for artificial intelligence, and the yen's persistent decline, despite Japan-U.S. joint intervention.

The BOJ's current policy of raising rates roughly twice a year may be accelerated, according to multiple sources familiar with the central bank's deliberations. The two-year Japanese government bond yield, which is most responsive to the BOJ's policy stance, rose after Reuters initially reported the deliberations, with the five-year yield reaching a record high.

Since ending a decade-long stimulus program in 2024, the BOJ has increased rates at roughly twice a year, with a significant jump to a 31-year high of 1% in June. While policy remained unchanged last month, the BOJ warned that mounting inflation pressures could push underlying inflation above its 2% target.

The July meeting's discussions revealed some board members calling for a faster pace of rate hikes to stay ahead of inflation. Governor Kazuo Ueda emphasized the need to consider the board's alarm over inflation risks in future meetings and hinted at potential acceleration of rate hikes if financial conditions were deemed too loose.

Inflation expectations are on the rise, with surveys indicating that household, firm, and economist expectations are approaching or surpassing the 2% target. July's annual wholesale inflation remained elevated at three-year high levels, suggesting that price pressures may spread to consumer goods as firms pass on higher costs. While the yen has dipped to a 40-year low, its downtrend is expected to persist, raising import costs and prices for a wide range of goods.

With underlying inflation nearing the 2% target, the BOJ must be vigilant about upside price risks, according to another source. As the policy rate approaches levels considered neutral for the economy, the BOJ has stressed the importance of carefully evaluating the impact of previous rate hikes on the fragile economy before proceeding with further hikes.