Global Market | Bank of Japan could raise rates in September, eye faster hikes: Reports

The Bank of Japan could raise interest rates as early as September and may consider accelerating the pace of future increases beyond its current pattern of roughly two hikes a year, according to three sources familiar with the central bank’s thinking, Reuters reported.

The potential shift reflects growing concern among BOJ policymakers about mounting inflation risks stemming from the Middle East conflict, strong global demand linked to artificial intelligence and continued weakness in the Japanese yen.

The BOJ is increasingly seen as likely to raise its policy rate at its September 17-18 meeting. Markets are pricing in nearly an 80% probability of such a move.


Since ending its decade-long stimulus programme in 2024, the BOJ has raised rates roughly twice a year, including in June when it lifted its policy rate to 1%, the highest level in 31 years.

Although the central bank left rates unchanged at its latest meeting, it issued its strongest indication yet that an earlier rate hike could be warranted. The BOJ warned that rising price pressures could push underlying inflation above its 2% target.

A summary of opinions from the July meeting also showed that some policymakers favoured a faster pace of rate increases to prevent inflation from running ahead of monetary policy, Reuters reported.

Inflation Risks Mount

BOJ Governor Kazuo Ueda has indicated that the central bank will closely consider the rising inflation risks when deciding the timing of future rate moves. He has also said the BOJ could accelerate rate increases if financial conditions become excessively loose.

Several developments are adding to concerns about an inflation overshoot. Surveys indicate that inflation expectations among households, companies and economists are approaching or exceeding the BOJ's 2% target.

Wholesale inflation also remained elevated in July, staying around three-year highs. This raises the possibility that higher input costs could increasingly be passed on to consumers through higher prices for goods.

The yen's continued weakness is another concern. Although the currency has recovered from a 40-year low reached last month, its broader downtrend could continue to raise import costs and contribute to domestic inflation, Reuters reported.

With underlying inflation already close to the BOJ's target, policymakers are becoming increasingly sensitive to upside risks, one of the sources said.

Yen Weakness Raises Pressure

The BOJ has previously stressed the need to assess the impact of earlier rate increases on Japan's fragile economy, particularly as the policy rate approaches levels considered neutral for economic activity.

However, intensifying inflation pressures could reduce the central bank's willingness to delay its next move.

Japan's joint currency intervention with the United States last month has also increased attention on the BOJ's potential response to persistent yen weakness. Comments from US Treasury Secretary Scott Bessent have added to expectations that Japanese monetary policy could play a role in supporting the currency.

A September rate increase could also pave the way for another hike in December, potentially signalling a shift toward a quarterly pace of monetary tightening.

Such a move would represent a significant change in the BOJ's policy trajectory as it seeks to balance persistent inflation and yen weakness against the risk of tightening monetary conditions too quickly for Japan's economy, Reuters reported.