Bank of Japan policymakers voiced hawkish views at last month's monetary policy meeting, including support for an earlier interest rate hike, according to a summary released by the central bank. Expectations are also spreading in the market that the BOJ will raise its benchmark rate to 1.5% by next spring.
The summary of key opinions from the July 30-31 meeting, published on the 10th, showed that several of the nine-member Policy Board expressed support for an early rate increase. One member noted that "a significant paradigm shift is emerging in the financial environment surrounding Japan, as the global trend of policy rate cuts turns toward tightening."
Concerns about larger-than-expected price increases also persisted. One member said that "on the price front, Middle East developments, expanding AI-related demand and a weak yen are all acting as upward pressure." Another member said that "with underlying consumer price index (CPI) approaching 2% and upside price risks warranting heavier consideration than before, rate hikes could proceed faster than the market expects, depending on the situation." The market had until now anticipated a rate increase roughly once every six months, so the remarks signaled the possibility of hikes at a faster pace.
The possibility of a "behind the curve" scenario, in which rates rise more slowly than the market expects, was also raised. One member argued directly that "if upside price risks materialize, it would not only deal a heavy blow to Japan's economy and people's lives but could also trigger a 'double shock,' forcing the central bank to carry out steep and large rate hikes down the road," adding that "there is a need to accelerate the pace of adjusting monetary easing."
There were also remarks mindful of the neutral rate, the benchmark for gauging the terminal level of rate increases. The BOJ estimates the neutral rate — one that neither overheats nor cools the economy — at 1.1% to 2.5% in nominal terms. One member said, "There is a need to raise the policy rate, which is below the estimated range for the neutral rate, to set a course toward normalization and to secure flexibility in policy decisions."
Alongside the BOJ's hawkish stance, a joint intervention by the United States and Japan late last month to buy yen in the foreign exchange market is another factor raising expectations of a rate hike, as countering yen weakness inevitably brings rate increases into discussion.
According to the Nihon Keizai Shimbun, the market is already pricing in a scenario in which the BOJ raises its benchmark rate, currently around 1.0%, to about 1.5% by next spring. Probability estimates on the timing of rate hikes released by the think tank Totan Research put the likelihood of an additional 0.25-percentage-point hike at next month's monetary policy meeting at 67%, and a hike at the meeting after that at nearly 100%. The likelihood of a further 0.25-percentage-point increase by March of next year exceeds 100%, effectively making it a foregone conclusion.
