Analysis: Why the BOJ will bet small on rate hikes now to avoid a bigger shock later

The Bank of Japan faces an awkward choice: move too aggressively and risk shocking an economy accustomed to near-zero borrowing costs, or move too cautiously and convince investors it has fallen behind inflation.

The consensus points to a conventional 25-basis-point increase, taking the policy rate to 1.25% at the Sept. 17-18 meeting. A 50-basis-point hike would be unusual. The last time Japan’s central bank raised its main policy rate by half a percentage point, in 1989, the country stood at the peak of an asset bubble that soon burst and helped produce the “Lost Decade.”

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Doing a 50-point hike could be seen as a sign of the BOJ’s desperation and put the market’s focus on the risk of it being behind the curve.

People familiar with the BOJ’s thinking say the bank has little appetite for repeating that kind of shock. Near-term price pressures remain contained, and officials want time to examine how higher rates affect corporate and household activity. A standard 25-point move would also avoid upending markets, particularly as the bond market is already jittery.

Yet the pressures on the BOJ are growing. Conflict in the Middle East, a tight domestic job market and rising import costs caused by the weak yen are pushing inflation higher. The bank is therefore considering raising rates roughly once a quarter, rather than maintaining its current pace of about two 25-basis-point hikes a year.

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The BOJ will probably hike rates to 1.25 per cent this month and do another 25-point increase in December or January next year, as a precaution against mounting inflation risks.

Nobuyasu Atago, a former BOJ official and chief economist at Rakuten Securities Economic Research Institute, said a larger move could send the wrong signal. “Doing a 50-point hike could be seen as a sign of the BOJ’s desperation and put the market’s focus on the risk of it being behind the curve,” he said. Atago expects a 25-basis-point increase this month, followed by another in December or January as a precaution against mounting inflation risks.

The BOJ began its current tightening cycle in 2024 after nearly three decades of deflation had encouraged officials to proceed cautiously. Recent hawkish comments from the central bank, pressure from U.S. Treasury Secretary Scott Bessent and remarks by board member Hajime Takata have fueled speculation about a larger increase. Governor Kazuo Ueda, however, said last week that economic and

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With the bond market already jittery, there’s no point for the BOJ to stage a surprise and cause further turmoil.