According to several sources familiar with policy developments, the Bank of Japan (BOJ) is closely monitoring upside risks to inflation, factors that could prompt the central bank to raise interest rates more quickly than the market generally expects. Policymakers broadly agree that the specific pace and timing of rate hikes cannot be predetermined and must be adjusted flexibly based on economic conditions and price trends. However, some officials note that if import price pressures stemming from a weak yen, combined with rising fuel costs triggered by geopolitical conflicts, push inflation faster than anticipated, the BOJ may have room to tighten monetary policy at a pace quicker than the market consensus.

Currently, the mainstream market view leans towards the BOJ raising rates only twice within a year, but if inflationary pressures intensify, the actual number of hikes could exceed this level. Corporate data indicates that cost increases are being passed on to consumers relatively steadily, while inflation expectations are also warming; these factors are all being considered in monetary policy formulation. The upcoming policy meetings in September and October could become critical junctures, where the market will focus on whether enterprises will further raise product prices in the summer to pass on cost pressures. Affected by similar news previously, both the yen exchange rate and Japanese short-term government bond yields have shown gains.

The BOJ already raised interest rates to 1% in June, marking the highest level in 31 years. Although the meeting next week is expected to keep the policy rate unchanged, the newly released quarterly economic projections may provide clues for the timing of the next rate hike. Analysts point out that the central bank may upgrade its economic growth forecast for the coming fiscal year and continue to focus on the risk of inflation exceeding the target level. The weak yen pushing up import costs, coupled with strong artificial intelligence demand driving up prices for certain commodities, may offset the inflationary relief brought by falling oil prices. While the possibility of inflation significantly exceeding the target due to downside risks to economic growth and geopolitical conflicts has eased, the risk of inflation spiraling out of control remains.

The yen exchange rate is currently hovering near a 40-year low, partly because the market believes the interest rate gap between the US and Japan will remain wide for a long time. Although BOJ officials emphasize that they will not directly use the exchange rate as a policy target, they have stated they are closely monitoring yen movements. The reason is that the impact of continuous yen depreciation on Japanese inflation is becoming more obvious than in the past. As rising import costs continue to transmit to domestic prices, the BOJ may have to take more aggressive rate hike measures to curb potential inflation risks. Given that current core inflation is already close to the 2% target, even if there is a limited magnitude of inflation risk, the central bank will place greater emphasis on the timing of future rate hikes.