On September 18, the Bank of Japan (BOJ) raised its benchmark interest rate by 0.25 percentage points, indicating that it may consider further increases at its next meeting or even a 0.5 percentage point hike. This marks a departure from its previous pattern of raising rates every six months, as the BOJ aims to adjust the pace and magnitude of increases based on inflation conditions. BOJ Governor Kazuo Ueda stated, "The phase of policy has changed," emphasizing the need for continued rate hikes to prevent inflation from exceeding target levels.
During a press conference following the monetary policy meeting, Ueda responded negatively when asked if he was considering a fixed interval for rate increases. He noted that the possibility of consecutive hikes or a 0.5 percentage point increase could not be ruled out, depending on inflation trends.
The BOJ's decision raised the benchmark rate from 1.0% to 1.25%, the highest level in 31 years. This increase comes three months after the last hike in June and reduces the typical six-month interval between increases. Ueda explained that by raising rates appropriately, the risk of being forced into larger hikes in the future could be mitigated.
The BOJ has placed greater emphasis on the likelihood of inflation rising more than expected. Ueda cited tensions in the Middle East, increased demand for artificial intelligence (AI), and the depreciation of the yen as factors contributing to inflation. He noted that price increases at the wholesale level are beginning to affect consumer prices. The underlying inflation rate, excluding temporary factors, is approaching the 2% target and poses a risk of exceeding it.
Ueda, who had previously raised rates cautiously considering the possibility of lower-than-expected inflation, stressed that "the phase of policy has changed." With the current rate increase, the benchmark rate has entered the BOJ's estimated neutral range (1.1% to 2.5%), which neither stimulates nor cools the economy, but he assessed that the current financial environment remains accommodative, suggesting room for further increases.
However, the BOJ did not provide specific guidelines on how far or how quickly rates would be raised. Ueda described the neutral rate as a "difficult concept to specify" and acknowledged that determining the terminal rate for rate hikes is also challenging. He indicated that future rate increases would be assessed based on economic, inflation, and financial conditions.
Market attention is focused more on the timing and pace of the next rate increase rather than whether there will be one. The BOJ has two remaining monetary policy meetings this year, in October and December. Kanda Keiji, chief economist at Daiwa Institute of Research, presented a baseline scenario where the benchmark rate could rise to 1.75% following increases in December and March of next year. He noted that a temporary reduction in the food consumption tax rate to 1% in April could increase inflationary pressures if durable goods consumption rises. If the 2% inflation target is not stabilized, the rate increase trend could continue beyond April.
Conversely, some analysts predict that as rates rise, the burden on businesses and households will increase, making it difficult to maintain a rapid pace of increases. Inoue Tetsuya, executive economist at Sony Financial Group, anticipates the next rate increase could occur in December or January. He believes that before the next increase, the market needs to perceive a faster pace of rate hikes. However, he also foresees that after the next increase, the growing burden on businesses and individuals will make it challenging to accelerate the pace of hikes.
Financial markets reacted to the BOJ's rate increase as less hawkish than expected. Two of the nine policy board members opposed the hike, contrasting with the unanimous decision by the U.S. Federal Reserve to raise rates on September 16, which led to the yen briefly rising to 157 yen per dollar. Iguchi Keiichi, senior strategist at Resona Holdings, characterized the BOJ's decision as a "dovish hike" compared to the Fed's hawkish stance.
Iguchi also noted that the upcoming retirements of policy board members Takata Hajime and Tamura Naoki, both considered hawkish, by July 2027 could influence future rate increases. He suggested that if the Takahashi administration appoints pro-reflation figures who favor active fiscal and monetary easing, the likelihood of additional rate hikes could diminish. As the perception grows that future rate increases will be more challenging, expectations for a stronger yen, which had increased following U.S.-Japan coordination, have also weakened.
* This article has been translated by AI.
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