The Bank of Japan flagged rising risks of inflation overheating in a summary of opinions from its July meeting, with one board member pointing to the possibility of an acceleration in the pace of interest rate hikes. The document, released on Monday, highlights a growing concern that underlying price trends are moving too fast.
âGiven that underlying CPI inflation has been approaching 2 per cent and greater consideration should be given to upside risks to prices than before, it could be considered that the pace of policy interest rate hikes will be faster than market expectations,â one of the nine board members said, according to the summary from the Jul 30-31 gathering.
The central bank held its policy rate at 1 per cent during the meeting. Yet, the relatively hawkish comments within the summary point to growing momentum toward a near-term increase.
Shifting Policy Focus
Discussions at the Bank of Japan indicate a significant pivot in how policymakers view the economy. One member stated that the policy focus has shifted from âlifting underlying CPI inflation to 2 per centâ to âavoiding further upward deviation in underlying CPI inflation.â
This represents a dramatic turn for an institution that struggled for decades to generate inflation. The sudden urgency to prevent prices from rising too quickly suggests the bank views its previous battle against deflation as effectively over, forcing a new set of priorities.
The summary suggests that waiting too long to act carries its own dangers. âIt cannot be said that âthe risk of waiting is marginal,â and it is therefore necessary for the Bank to accelerate the pace of adjustment to the degree of monetary accommodation,â the member added.
Related: Seoul stocks stabilize after sharp selloff
Officials debated the neutral interest rate, defined as the borrowing level that neither stimulates nor cools the economy. The BOJ has estimated this neutral level falls somewhere between 1.1 per cent and 2.5 per cent. Since the current rate remains below the lower bound of that range, one member argued it must rise to set a foundation for normalization.
Determining the precise neutral rate is difficult. Even if the exact number remains unclear, the consensus is that the current rate of 1 per cent is too low to maintain economic stability without fueling further inflation.
Overnight swaps show market players see a two-thirds chance of a move in September. The possibility of a move by October is priced at 96 per cent. Investors are already pricing in an adjustment well before the end of the year.
The summary does not disclose which specific member made each comment during the gathering.
Currency and Market Context
The yen was largely unmoved against the dollar immediately after the release. It weakened slightly to around 158.05 against the dollar in mid-morning Tokyo trading.
Factors strengthening expectations of an early move include ongoing weakness in the yen, which fuels import costs. Japanâs currency weakened to a 40-year low against the dollar last month, raising concerns about global financial market stability.
Related: Seller becomes trustee in property deals
Authorities recently intervened in the foreign exchange market to support the yen. The United States entered the market alongside Japan on the day after the July decision to help prop up the currency.
Only one of the nine board members, Hajime Takata, called for a back-to-back raise at the meeting. However, Governor Kazuo Ueda struck a hawkish tone at his post-decision press briefing, emphasizing that he sees greater upside risks to the price outlook.
The bank must now weigh external variables as it determines the timing of further hikes. One member said the BOJ needs to carefully examine the impact of the Middle East situation, AI-related demand, and developments in foreign exchange rates.
âIn doing so, the current phase calls for due attention to upside risks to the underlying trend in prices,â the member said. A member said the bank needs to discuss the size of a rate hike, rather than adhering to a certain pace of rate hikes, to adopt a nimble approach in response to factors such as changes in overseas financial conditions.
Officials signaled that a move in September is possible. The document states the bank is closely watching the impact of the weak yen on prices and growth.