Bank of Japan eyes September rate hike, faster tightening: sources

The Bank of Japan is contemplating an interest rate increase as early as September, signaling a potential shift in its monetary policy. Sources familiar with the bank's thinking suggest that policymakers are also considering a more aggressive pace of tightening beyond the current rhythm of roughly two hikes per year.

This potential move stems from growing alarm over persistent price pressures. Factors contributing to this include the conflict in the Middle East, robust global demand for artificial intelligence technologies, and the continued depreciation of the Japanese yen. These elements have exacerbated import costs and are contributing to underlying inflation nearing the central bank's 2% target.

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An early rate hike has come into sight.

Since ending its massive stimulus program in 2024, the BOJ has gradually increased rates, reaching 1% in June. However, recent communications indicate a heightened sensitivity to inflation risks. Some board members have voiced concerns about falling behind the curve on inflation, suggesting a need for quicker action. Governor Kazuo Ueda has acknowledged these concerns, stating that the bank will consider the board's alarm over inflation risks in future meetings and may accelerate hikes if financial conditions are deemed too loose.

The bank's assessment is influenced by surveys showing rising inflation expectations among households, firms, and economists. Elevated wholesale inflation in July further suggests that price pressures may soon translate to consumer goods. While Japan conducted a rare joint intervention with the U.S. last month to support the yen, analysts anticipate its downtrend may continue, further impacting import prices. Given these factors, the BOJ may opt not to delay rate increases significantly, even as it balances the impact on the fragile economy.

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The BOJ could also accelerate the pace of rate increases.