BOJ debated need for more rate hikes, scope for faster moves, September minutes show

The Bank of Japan's policymakers acknowledged the necessity to continue raising interest rates, with some suggesting a more rapid approach, according to minutes of their September gathering. This assertion strengthens the argument for an additional rate increase in December. They also delved into Japan's target interest rate and the central bank's projected terminal rate, reflecting their heightened focus on how extensively they could lift borrowing costs without stifling economic growth excessively.

One member opined, "If indications of an upward price shift appeared, the BOJ would need to expedite the rate hikes." Another board member cautioned that while immediate, aggressive action was not required, the institution should manage policy judiciously to avoid "excessive and persistent price surges." A separate member emphasized the value of bringing the BOJ's policy rate nearer to the anticipated goal soon to allow for responsive action to unforeseen economic shifts.

At their September session, the BOJ had lifted its key interest rate to a 31-year peak of 1.25% and signaled a shift towards a policy focused on preventing inflation from overshooting its 2% target. The central bank maintained the interest rate steady at a subsequent meeting in October but reiterated its vigilance towards inflation risk, consolidating market expectations for a hike in December.

The September meeting saw many board members projecting consumer inflation to rise from autumn, supported by surveys indicating growing price hikes for food items. Many also shared the belief that inflation risk would remain elevated due to a resurgence in crude oil prices sparked by the ongoing Middle Eastern conflict and global energy demand.

"The BOJ should maintain a timely approach to raising rates without becoming overly cautious" and conduct thorough analysis of inflation risk, one member was quoted as saying. The BOJ's September rate increase followed a June hike, a shorter interval than the roughly twice-a-year increases in 2024 and 2025, driven by rising price pressures from the Middle East war, high import costs due to a weak yen, and the global AI boom.

As inflationary pressures persist, markets are keenly watching the terminal rate, or the maximum extent to which the BOJ could raise interest rates during the current hiking cycle. Analysts' estimates for the terminal rate range from 1.5% to 2.0%, based on a Reuters poll. The terminal rate is closely tied to the central bank's estimation of Japan's neutral rate, or the level that neither stimulates nor slows the economy.

BOJ staff calculations place the nominal neutral rate between 1.1% and 2.5%, but the bank has been intentionally ambiguous about its precise position in practice. There is no unanimous consensus within the board on the extent to which the BOJ should raise rates. While some members noted that market pricing of the neutral and terminal rates had increased, one suggested that rates reflected both Japan's economic and price outlook and global developments, the minutes revealed.

One member asserted that Japan's nominal neutral rate could be above 2%, while another warned that market expectations for the BOJ's terminal rate might exceed levels justified by Japan's wage and price dynamics. Given the challenge in defining the neutral rate, many members agreed to continue raising interest rates closely monitoring the impact of past rate hikes on financial conditions.

Several high-profile public appearances by BOJ executives could provide insights into their perspectives on future rate hikes. BOJ Governor Kazuo Ueda will address an IMF seminar in Washington on Friday, followed by a speech by dovish board member Toichiro Asada, one of the two dissenters to the September rate-hike decision, on November 12. Hawkish members Hajime Takata and Naoki Tamura will also deliver speeches this month.