According to foreign media reports, the Bank of Japan (BOJ) may raise interest rates earlier than the market generally anticipates. A former BOJ Executive Director noted that the probability of raising the benchmark rate for the second consecutive month at the October policy meeting is rising, a pace that would be significantly faster than the forecasts of most economists.
The BOJ has just completed a rate hike merely three months after its June move, signaling an accelerating pace of monetary policy normalization. BOJ Governor Kazuo Ueda has explicitly stated that the policy focus has shifted from driving inflation to the target level to preventing inflation from rising more than expected. The former Executive Director believes this statement sends a clear signal that the pace of future rate hikes could further accelerate. Given that the risk of underlying inflation breaching the target is unlikely to diminish in the coming months and may even intensify, coupled with the fact that the current 1.25% interest rate remains relatively low, the rationale for continuing to raise rates at a relatively swift pace is highly compelling.
The latest price trend data also corroborates the upward pressure on inflation. Excluding fresh food and temporary factors, the core inflation gauge expanded to a 2.6% year-on-year increase in August, up from 2.3% in July. Under the baseline scenario, the BOJ's policy rate is projected to reach a terminal level of around 2% by the middle of next year, implying room for several more rate hikes, while the median market expectation for the terminal rate stands at just 1.75%.
Recently, major global central banks have witnessed a rare phenomenon of synchronized rate hikes. Although the BOJ raised interest rates at its last meeting, the yen weakened, primarily due to dissenting votes within the Policy Board. Two board members recently appointed by Prime Minister Sanae Takaichi cast dissenting votes, with Takaichi historically favoring monetary easing. However, analysts argue that these dissenting opinions are insufficient to reverse the overall trajectory of monetary policy normalization. The Japanese government is highly unlikely to intervene, as blocking rate hikes could trigger further depreciation of the yen, thereby exacerbating domestic inflationary pressures in a context where the country is heavily reliant on imports for energy and food.
In terms of market pricing, traders are assigning approximately a 30% probability to another rate hike by the end of October. By contrast, most economists expect the next move to occur in December this year or January next year, with 58% anticipating a hike in January and about 35% expecting action in December. Nevertheless, some observers argue that the likelihood of postponing the next hike to the end of the year or later is extremely low. The core of the market debate now centers on whether the central bank will deem the rate hike as an absolute imperative.
