The Bank of Japan (BOJ) is increasingly looking towards a September rate hike and could move more aggressively with subsequent increases as policymakers grow more concerned about persistent inflation pressures, three sources familiar with its thinking said.
The central bank could raise its policy rate at its September 17-18 meeting, with markets already pricing in nearly an 80% chance of such a move. A September increase could also pave the way for another hike in December, potentially putting the BOJ on a quarterly tightening path.
“An early rate hike has come into sight,” one source said, pointing to a strong possibility of action at the next policy meeting.
“The BOJ could also accelerate the pace of rate increases,” the source said, a view echoed by another source.
The BOJ has raised rates roughly twice a year since ending its decade-long stimulus programme in 2024. Its latest increase, in June, took the policy rate to 1%, the highest in 31 years.
But policymakers are now facing a combination of factors that could push them to tighten faster, including the weak yen, rising inflation expectations, strong global demand linked to artificial intelligence and price pressures stemming from the Middle East conflict.
The yen’s decline has remained a particular concern. Although the currency has recovered from a 40-year low reached last month, its broader downtrend could continue to raise import costs and feed into prices for a wide range of goods.
Inflation expectations are also becoming harder for policymakers to ignore, with surveys showing expectations among households, companies and economists approaching or exceeding the BOJ’s 2% target.
Japan’s wholesale inflation also remained elevated at a three-year high in July, increasing the risk that higher costs will eventually be passed on to consumers.
The BOJ has already signalled greater willingness to respond to those risks. At its July meeting, it kept rates unchanged but issued its strongest warning yet that mounting price pressures could push underlying inflation above its 2% target.
A summary of opinions from that meeting showed some policymakers arguing for a faster pace of rate increases to prevent inflation from getting ahead of the central bank.
Governor Kazuo Ueda said after the July meeting that he would take the board’s growing concerns over inflation into account when guiding future policy. He also said the BOJ could accelerate rate hikes if financial conditions became too loose.
The central bank still faces a balancing act as its policy rate approaches levels considered neutral for the economy. Officials have stressed the need to assess the impact of previous hikes on Japan’s fragile economic recovery before moving again.
“Given heightening inflation risks, however, the BOJ may not want to wait too long in raising rates,” a third source said.
The sources spoke on condition of anonymity because they were not authorised to speak publicly. The BOJ declined to comment when contacted by Reuters.
Markets have also been paying closer attention to the BOJ’s role in supporting the yen following Japan’s joint currency intervention with the United States last month and comments from US Treasury Secretary Scott Bessent urging Tokyo to reinforce intervention with policies that support the currency’s fundamentals.
The shift in expectations has already been reflected in Japan’s bond market. The two-year Japanese government bond yield, which is particularly sensitive to BOJ policy expectations, rebounded after Reuters reported the central bank’s deliberations while the five-year yield climbed to a record high.
