Bank of Japan Deputy Governor Ryozo Himino has strengthened expectations for an interest rate increase in September, warning that policymakers need to act in time to prevent inflation from moving persistently above the central bank’s 2% target.
Himino stopped short of committing to a September hike or indicating how quickly borrowing costs could rise thereafter. But his comments were broadly hawkish and reinforced market expectations that the BOJ is approaching another policy tightening cycle.
“We must balance the need to gain as much information as possible, and acting in a timely fashion to avoid being behind the curve on inflation,” Himino told reporters on Thursday.
“We will debate that balance at each meeting, mindful of the fact underlying inflation is approaching 2%,” he said.
Markets had been closely watching Himino’s remarks because of his previous record of providing relatively clear signals ahead of policy changes. His comments were interpreted as leaving the September meeting firmly open for a rate increase.
“He didn’t rule out the chance of a September rate hike and was generally hawkish as expected,” said Shotaro Mori, senior economist at SBI Shinsei Bank. “The September meeting is likely to be live.”
Reuters has reported, citing sources, that the BOJ is considering raising its policy rate as soon as September and could subsequently tighten monetary policy more aggressively than the current pace of roughly two increases a year. Expectations for a September move have strengthened following a sharp increase in wholesale inflation and increasingly hawkish signals from BOJ officials. Markets are now pricing in a rate increase with a high degree of confidence.
The central bank’s concern is now shifting from whether Japan can generate inflation to whether price growth could overshoot its target.
In a speech before his news conference, Himino said Japan had entered a phase in which policymakers must pay greater attention to upside risks to inflation.
“If underlying inflation deviates above our 2% target, that would have an adverse impact on the economy. We should pay greater attention to upside risks to prices than in the past,” Himino said.
“In-depth deliberations should be held at each monetary policy meeting with these perspectives in mind,” he added.
Several forces are contributing to the inflation risks.
Himino pointed to rising fuel costs linked to the conflict in the Middle East, strong global demand associated with artificial intelligence and elevated import prices resulting from the yen’s weakness. The combination is considered crucial for Japan because higher energy and import costs can quickly feed into household prices while also squeezing businesses.
Japan’s wholesale inflation rose 7.2% year-on-year in July, highlighting the strength of those cost pressures. Economists expect some of the impact from higher fuel prices to pass through to consumer prices with a lag.
Himino nevertheless maintained that his assessment of Japan’s broader economic and price outlook had not changed substantially since the BOJ’s July meeting. He said weak signals from second-quarter GDP data were likely to have been driven largely by technical factors, suggesting policymakers should not overreact to the recent economic slowdown.
The BOJ raised its key policy rate to 1% in June, the highest level in 31 years, before leaving rates unchanged at its July meeting. At the July meeting, however, policymakers issued some of their strongest warnings yet about rising inflation risks.
Himino is now arguing that maintaining excessively accommodative financial conditions could itself create risks.
“Raising rates in a timely manner will help avoid a spike in inflation and abrupt rate hikes in the future,” he said, adding that such an approach would ultimately benefit smaller companies.
He rejected the argument that additional rate increases would necessarily damage Japan’s still-fragile economy. Instead, Himino said adjusting financial conditions could improve the allocation of capital by directing funds toward investments with stronger growth potential.
“As we are still pressing on the accelerator, or keeping financial conditions accommodative, I believe we will need to ease off in a timely manner through rate hikes,” Himino said.
The language matters because the BOJ remains well behind most major central banks in terms of the level of interest rates, even after its recent tightening. Japan spent years battling deflation and weak wage growth, leaving policymakers reluctant to withdraw monetary support too quickly.
The policy environment has now changed.
Underlying inflation is approaching the BOJ’s 2% objective, while higher energy costs, a weak yen and strong global demand are creating additional upside risks. The challenge for the central bank is to withdraw accommodation without choking off the economic recovery that has allowed Japan to move away from its long period of deflation.
The timing of further increases will therefore depend heavily on incoming data.
Himino said policymakers would assess economic activity, prices and financial conditions at each meeting rather than commit to a predetermined path. That leaves September as a potentially important turning point. A rate increase would signal that the BOJ is becoming more confident that inflation is sufficiently entrenched to justify further normalization of monetary policy.
The bigger question for markets is what follows.
If inflation continues to accelerate, the BOJ could be forced to raise rates more frequently than its current roughly twice-yearly pace. That possibility is already being considered by markets, particularly as wholesale price growth accelerates and external cost pressures intensify.
At the same time, a more aggressive tightening cycle could strengthen the yen by narrowing the gap between Japanese and overseas interest rates. A stronger currency would help reduce imported inflation, although it could also weigh on Japanese exporters.
Himino’s comments therefore mark a delicate shift in the BOJ’s policy calculus. The central bank is no longer focused only on supporting Japan’s emergence from deflation. It must now guard against allowing an inflationary cycle to become entrenched.
While the message from Himino was not an explicit promise of a September hike, it was clear enough to keep the market focused on the possibility that the BOJ is preparing to move again. Analysts now believe that the central bank’s immediate task is to take its foot off the monetary accelerator gradually enough to preserve economic momentum, while moving quickly enough to prevent inflation from running beyond its 2% objective.
