Global Market | BOJ Rate Decision: Why a jumbo 50-bps hike looks unlikely in September

Japan’s central bank is facing a delicate policy decision as investors assess whether it could accelerate monetary tightening with a larger-than-usual interest rate increase at its September meeting.

The Bank of Japan (BOJ) is widely expected to raise its policy rate by 25 basis points to 1.25% at its September 17-18 meeting. However, speculation has emerged over whether the central bank could opt for a 50-basis-point increase, a move that would mark a sharp departure from its gradual approach.

The debate comes against the backdrop of Japan’s experience with the asset bubble of the late 1980s. The BOJ last raised its main policy rate by 50 basis points in 1989, when soaring asset and land prices were approaching their peak. The bubble subsequently burst, contributing to years of economic stagnation.


Read more: Global Market: Japan stocks mixed as strong data boosts rate-hike bets

BOJ likely to stick with gradual approach
According to Reuters, people familiar with the BOJ’s thinking see little appetite within the central bank for a 50-basis-point increase this month. Policymakers remain concerned that such a move could shock households and businesses that have become accustomed to decades of ultra-low borrowing costs.

A conventional 25-basis-point hike would allow the BOJ to continue tightening policy while giving policymakers more time to assess how higher interest rates are affecting corporate activity, household spending and bank lending.

Read more: Global Market: Kospi extends winning streak to four sessions as Samsung, SK Hynix rally

The central bank began its current tightening cycle in 2024 and has so far relied on 25-basis-point increases, moving at a pace of roughly two hikes a year.

However, BOJ is considering a faster pace of rate increases, potentially moving toward roughly one hike every quarter. Persistent inflation, a tight labour market, higher import costs and the effects of a weaker yen have increased pressure on policymakers to act more quickly.

Inflation risks remain a key concern
Japan’s inflation outlook has become more challenging in recent months. Rising import costs linked to the yen’s weakness, along with higher producer prices, could put additional pressure on consumer prices in the months ahead.

At the same time, there are limited signs of the kind of uncontrolled price and wage spiral that would normally justify an aggressive tightening cycle.

Reuters reported that BOJ officials remain particularly focused on the cumulative impact of previous rate increases. Policymakers are also assessing how households and companies will respond to higher borrowing costs after an extended period of exceptionally loose monetary policy.

Bank lending nevertheless remains strong, rising 5.4% year-on-year in August, suggesting that financial conditions are still relatively accommodative.

Yen strength eases pressure for a larger hike
The yen’s recent appreciation has also reduced some of the urgency for a large rate increase.

The Japanese currency has climbed to around 153 per dollar, its strongest level in seven months, after having fallen close to 164 per dollar in July. A stronger yen can help reduce imported inflation by lowering the domestic cost of foreign goods and commodities.

Reuters reported that this improvement gives the BOJ greater flexibility to pursue a gradual approach rather than delivering a surprise 50-basis-point increase.

Hawkish signals add to market uncertainty
Expectations for a September hike have been reinforced by increasingly hawkish comments from BOJ officials and pressure from the United States, including remarks from U.S. Treasury Secretary Scott Bessent.

Comments from BOJ board member Hajime Takata had also fuelled speculation that policymakers could consider a larger-than-normal increase.

Governor Kazuo Ueda, however, has indicated that economic and price developments remain broadly consistent with the central bank’s forecasts. His recent comments suggested there was not yet enough evidence of a sharp deterioration in the inflation outlook to warrant an unusually large hike.

Ueda has also stressed the need to assess the cumulative impact of the BOJ’s previous rate increases as the central bank gradually moves away from its ultra-loose monetary policy.

Divisions within the BOJ
The nine-member policy board is also likely to weigh differing views on the appropriate pace of tightening.

More cautious policymakers may argue that the policy rate is approaching levels considered neutral for the Japanese economy. BOJ staff estimates put the neutral rate in a range of roughly 1.1% to 2.5%.

Board member Toichiro Asada, who opposed the BOJ’s June decision to raise rates to 1%, has argued that policymakers should wait for clearer evidence of demand-driven inflation before supporting further increases.

Another board member, Ayano Sato, has also highlighted the need to consider downside risks to economic growth alongside the upside risks to inflation.

Markets await the BOJ’s next move
For now, a 25-basis-point increase appears to be the more likely outcome for September. Such a move would allow the BOJ to maintain its tightening cycle without creating unnecessary disruption in financial markets.

Policymakers could then consider another 25-basis-point increase in December or early next year if inflationary pressures persist.

The key challenge for the BOJ is therefore to balance the need to prevent inflation from becoming entrenched against the risk of tightening too aggressively. With Japan emerging from decades of deflation and ultra-low interest rates, the central bank is likely to favour a measured path while keeping the option of faster rate increases open if price pressures intensify.


(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of The Economic Times.)