The United States reportedly demanded that the Bank of Japan (BOJ) accelerate its interest rate hikes as a condition for last month's joint yen-buying intervention. With increasing pressures from yen depreciation and rising prices, the BOJ's rate hike intervals, which had been every six months, may shorten. The market is increasingly accepting an additional rate hike in September as a given.
According to the Nihon Keizai Shimbun (Nikkei) on August 24, several BOJ officials stated, "If we do not increase the pace of rate hikes, inflation could rise significantly, adversely affecting the economy," and noted that "the need to shorten the intervals between hikes, which have been every six months, is a common understanding among many policy board members," reinforcing the sentiment for an early rate increase in the market.
The BOJ's next monetary policy meeting is scheduled for September 17-18. According to financial market research firm Dotan Research, the probability of a rate hike in September exceeded 80% as of the afternoon of August 21. A bond manager at a financial institution remarked, "We are already trading as if a September rate hike is a certainty."
The push for an early rate hike stems from the joint yen-buying intervention conducted at the end of July. A Japanese government official told Nikkei, "Among the conditions presented by the U.S. for participating in the joint intervention was that the BOJ would raise rates more quickly."
The U.S. has raised these conditions due to concerns over rising U.S. Treasury yields. Many view the recent U.S.-Japan joint intervention as a measure to prevent yen depreciation and rising Japanese interest rates from leading to a sell-off of U.S. Treasuries. The U.S. Treasury Department announced on August 19 that it would double the scale of its bond purchases and redemptions, but the effect on lowering rates has been limited. If the BOJ does not raise rates as aggressively as the market expects, yen depreciation and rising long-term interest rates in Japan could worsen, potentially impacting the U.S. Treasury market. Nikkei noted that the BOJ now bears the burden of ensuring that its actions do not shock global markets beyond stabilizing domestic prices.
This U.S. demand aligns with recent trends in Japan's policy management. The BOJ ended its negative interest rate policy in March 2024 and raised rates in July of the same year, as well as in January and December of the previous year, and in June of this year. During this period, the Ministry of Finance and the BOJ also engaged in yen-buying interventions in July 2024 and April-May of this year. Nikkei explained that a pattern has emerged where rate hikes follow relatively shortly after currency interventions. Japan's excessively low policy interest rates have been identified as a factor contributing to yen depreciation, prompting the BOJ to correct this through simultaneous interventions and rate hikes.
The BOJ is cautious about yen depreciation because companies are passing on rising costs to consumers more quickly than in the past. During the July monetary policy meeting, the BOJ identified rising international oil prices, increased demand related to artificial intelligence (AI), and yen depreciation as risks that could push inflation higher than expected. In fact, Japan's corporate price index rose 7.2% in July compared to the same month last year. Excluding volatile fresh food and energy, the consumer price index also saw a 1.9% increase, marking the largest rise in nine months. This indicates that inflation driven by yen depreciation is becoming a reality.
However, a September rate hike is not yet confirmed. Within the BOJ, there remains a cautious view that "it is not yet the time to conclude that a September hike is certain." If a hike occurs in September, it would be just three months after the previous increase, and four months if it happens in October, both of which are quicker than the previous six-month intervals. The BOJ plans to weigh the timing of any additional rate hikes based on upcoming economic indicators and international trends.
Two key events are particularly noteworthy for the market. First is the speech and press conference by BOJ Deputy Governor Ryozo Himino on August 27. Himino made comments suggesting a rate hike during a speech prior to the January increase last year. As the market anticipates a September hike, there is keen interest in whether he will provide supporting signals this time.
The second event is the G20 meeting of finance ministers and central bank governors in the U.S. from August 31 to September 1. U.S. Treasury Secretary Scott Vessenet expressed on X (formerly Twitter) that he looks forward to meeting BOJ Governor Kazuo Ueda, stating he believes Ueda will "do what is necessary," hinting at expectations for an additional rate hike. A press conference featuring Finance Minister Satsuki Katayama and Governor Ueda is also expected after the G20 concludes.
Market attention is already shifting to potential further hikes after September. If rates are raised in both June and September, the next hike could occur in December. Expectations for the peak of rate hikes have also risen above 2%. Naoki Tamura, a prominent hawk on the BOJ board, views the neutral interest rate, which neither overheats nor cools the economy, to be around 2%, envisioning a scenario where rates continue to rise toward that level. Conversely, a BOJ executive noted that the exact level of the neutral rate is not clearly defined. Nikkei pointed out that the ultimate target for rate hikes set by the BOJ remains unclear.
The challenge is that increasing the pace of rate hikes could lead to greater side effects. If long-term interest rates rise further, local banks may face increased valuation losses on their bond holdings, adding pressure to the financial system. Nikkei assessed that it remains uncertain how well the Takaiichi Sanae administration, which is actively pursuing fiscal policies amid a lack of clear domestic recovery, and the BOJ can synchronize their rate hike strategies.
* This article has been translated by AI.
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