BOJ leans toward quarter-point rate hike at Sept. 18 meeting

The Bank of Japan is leaning toward raising its benchmark interest rate by 25 basis points to 1.25% at its two-day policy meeting ending September 18, according to people familiar with the matter cited by Bloomberg. The move would mark the shortest interval between rate hikes under Governor Kazuo Ueda, coming just three months after the BOJ's last increase in June.theedgemalaysia

Upside Inflation Risks Drive the Case

BOJ officials continue to see inflation risks skewed to the upside, with rising service prices and persistent yen weakness strengthening the case for action. Economic developments remain broadly in line with the central bank's outlook, and officials said there has been no major change in conditions that would warrant a larger half-point increase.theedgemalaysia

Board member Hajime Takata, who dissented in favor of a hike when the board held rates steady in July, said on September 2 that the BOJ needs to "consider a broad range of options, not just a 25bps hike each time," floating the possibility of larger moves. Takata also said the BOJ should "conduct rate hikes nimbly after gauging the degree of accommodation in domestic financial conditions".newsquawk

Washington's Shadow Over Tokyo

The decision comes under unusual scrutiny from Washington. US Treasury Secretary Scott Bessent made clear during a Group of 20 finance ministers' meeting that he wants higher Japanese rates, and in a bilateral meeting with Ueda discussed "the importance of sound policy formulation to anchor inflation expectations and avoid excess currency volatility". Bessent's influence carries additional weight after the US joined Japan in buying yen on July 31 — the first coordinated intervention by the two countries since 1998.theedgemalaysia

Markets are already pricing in the move. Overnight index swaps imply investors expect the rate change, and a decision to hold could itself risk jolting global financial markets. The yen was trading around 157 per dollar after the Bloomberg report, with some traders having positioned for a larger hike. The EUR/USD pair edged higher while the broader dollar index slipped.straitstimes+1

What Comes Next

The BOJ also announced a market operations meeting scheduled for October 14. Such gatherings have historically served as vehicles for adjustments to Japanese government bond buying schedules and purchase frequency, and can signal shifts in yield management. Japan's 10-year JGB yield recently breached 3%, while the 30-year yield hovered near record highs before easing on September 3.newsquawk+1

Japan's key inflation gauge is expected to head toward 3% after government subsidies helped cool it in recent months, according to economists surveyed by Bloomberg. Prime Minister Sanae Takaichi's preference for accommodative monetary conditions remains a source of uncertainty over whether the BOJ can sustain a faster pace of tightening.theedgemalaysia