The Bank of Japan may raise interest rates as early as September, and the pace of subsequent rate hikes may accelerate

Author: Long Yue
According to three informed sources from the media, the Bank of Japan is expected to raise interest rates at its policy meeting on September 17-18, and is considering accelerating the tightening pace thereafter. Since 2024, the Bank of Japan's rate hike pace has been about twice a year. The current market has priced in nearly an 80% probability of a rate hike in September.
The Bank of Japan is facing the most urgent pressure to raise rates since exiting its ultra-loose policy in 2024.

According to a Reuters report on August 14, three sources familiar with the internal discussions of the Bank of Japan (BOJ) revealed that the bank is expected to raise rates as early as September and is considering accelerating the tightening pace beyond the current rate of about twice a year.

One informed source bluntly stated, "An early rate hike is now in sight." Another source indicated, "The Bank of Japan may also accelerate the pace of rate hikes."

This signal means that the policy meeting on September 17-18 will become a key turning point. The current market has priced in nearly an 80% probability of a rate hike in September.

From "Twice a Year" to "Once a Quarter"

Since exiting a decade-long ultra-loose stimulus policy in 2024, the Bank of Japan's rate hike pace has been about twice a year. In June of this year, the bank raised interest rates to 1%, a new high in 31 years.

If a rate hike occurs as scheduled in September, some analysts quoted by Reuters believe that the space for another rate hike in December will subsequently open up. This would bring the total number of rate hikes for the year to three, and the market's expectation of "one rate hike per quarter" will also be strengthened.

The joint intervention in the yen exchange rate by Japan and the U.S. last month, along with pressure from U.S. Treasury Secretary Janet Yellen, has further focused the market's attention on how the Bank of Japan will respond to the ongoing weakness of the yen. Rate hikes themselves are also one of the policy tools to support the yen—higher interest rates typically attract capital back, providing support for the exchange rate.

Inflation Pressure Coming from Multiple Directions Simultaneously

The underlying logic for the Bank of Japan's accelerated tightening is that inflation risks are heating up from multiple dimensions.

Yen Depreciation. The yen hit a 40-year low last month, and despite the rare joint intervention by Japan and the U.S., the depreciation trend has not reversed. A weaker yen directly raises import costs and transmits to a wide range of consumer goods prices.

High Wholesale Prices. In July, Japan's annual wholesale inflation remained at a three-year high, indicating that cost pressures on the corporate side have not yet fully transmitted to the consumer side—once companies start to pass on costs, consumer prices will rise further.

Rising Inflation Expectations. Surveys show that inflation expectations among households, businesses, and economists have approached or exceeded 2%. This is one of the signals the central bank is most wary of—once expectations become unanchored, controlling inflation will become exponentially more difficult.

External Shocks Overlay. Ongoing conflicts in the Middle East continue to disrupt energy and commodity prices, while strong global demand for AI is pushing up the demand for related equipment and energy, both of which contribute additional input inflation pressure.

Inside the Central Bank: Cannot Wait Too Long

The Bank of Japan kept interest rates unchanged in July but simultaneously issued its strongest signal yet for an early rate hike—warning that inflation pressures are continuing to accumulate, which may push core inflation above the 2% target.

The summary of opinions from the July meeting indicated that some members explicitly called for accelerating the pace of rate hikes to avoid being "behind the curve" in responding to inflation—this is a common phrase in the central bank policy circle, meaning that if actions are slow, greater tightening will be needed later to remedy the situation.

Governor Kazuo Ueda stated at a press conference after the July meeting that he would fully consider the committee's growing vigilance regarding inflation risks when presiding over future meetings, and pointed out that if financial conditions are deemed too loose, the central bank may accelerate the pace of rate hikes.

One third informed source expressed more directly, "Given the rising inflation risks, the Bank of Japan may not want to wait too long on the issue of rate hikes."