The Bank of Japan has sent its strongest signal yet that interest rate hikes could accelerate, as a summary of opinions from its July meeting revealed growing concern among board members that inflation is overshooting the central bank’s 2% target.
Given that underlying CPI inflation has been approaching 2% 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, one board member said in the summary released Monday, according to CNBC TV18.
The comments came after the BOJ held its policy rate steady at 1% at the July 30-31 meeting, its highest level since 1995 following a historic hike in June. Governor Kazuo Ueda struck a hawkish tone at his post-decision press briefing, emphasizing that he sees greater upside risks to the price outlook. Board member Hajime Takata was the sole dissenter, calling for an immediate hike to 1.25%.
One board member argued the policy focus has shifted from lifting underlying CPI inflation to 2% to avoiding further upward deviation in underlying CPI inflation, calling on the BOJ to accelerate the pace of monetary tightening. The central bank has estimated its neutral interest rate sits between 1.1% and 2.5%, meaning the current 1% policy rate remains below even the lower bound of that range.
Overnight interest rate swaps now price in a two-thirds probability of a BOJ move in September, with a 96% chance of a hike by October. The yen weakened slightly to around 158 per dollar following the summary’s release, adding to pressure on the central bank to act. Japan’s currency had fallen to a 40-year low against the dollar last month, prompting authorities to intervene in foreign exchange markets.
The yen’s persistent weakness is a key driver behind the BOJ’s hawkish turn, as a cheaper currency raises import costs and feeds through to consumer prices. Japan imports roughly 90% of its crude oil from the Middle East, making it especially vulnerable to the energy price spikes caused by the ongoing US-Iran conflict and disruptions to the Strait of Hormuz.
Analysts at Capital Economics maintained their forecast that the BOJ will lift rates to 2% by the end of next year, describing the July summary as hawkish. The yen carry trade, fueled by the widening yield gap between US Treasuries and Japanese government bonds, continues to weigh on the currency even as the BOJ signals tighter policy ahead.
Sources: CNBC TV18 Business Times Taipei Times
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