Bank of Japan official: Willing to accept a faster pace of rate hikes than once every six months

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Bank of Japan officials have sent a signal that if the risk of rising inflation persists, they are willing to raise interest rates at a pace faster than generally expected by the market. This stance makes the prospect of another rate hike within the year more certain.

According to media reports on the 22nd citing informed sources, although most economists predict that the Bank of Japan’s next move will come in December, central bank officials made it clear there is no preset path, and if necessary, action may be taken before the end of the six-month window. The yen has recently fallen to its lowest level in about forty years, creating new upward pressure on inflation and further heightening officials’ vigilance. Overnight index swap data shows that the market has now priced in about a 72% probability of another rate hike before October.

This signal sparked an immediate reaction in the Japanese government bond market. The yield on Japan’s two-year government bond climbed to its highest level since 1995 on Wednesday, while the five-year yield also rose to 1.995%, and the yen strengthened from around 163.13 to 162.69 against the US dollar.

Inflation Nears Target, Policy Focus Quietly Shifting

According to informed sources cited in the report, the core factor prompting officials to consider a more rapid pace of rate hikes is that Japan’s underlying inflation rate has become increasingly close to the 2% target set by the central bank more than 13 years ago.

Officials have noted that the speed at which companies are passing on costs downstream is accelerating. This change in pricing behavior is closely related to the market environment after the outbreak of the Iran conflict. Against this backdrop, another weakening of the yen could further stimulate price hikes by companies.

It is worth noting that officials’ understanding of the policy mission is also quietly evolving — the policy focus is shifting from "driving inflation higher" to "ensuring inflation remains stably anchored near the target." This shift in logic means that even if inflation has not yet exceeded the target, the authorities have sufficient reason to act in advance.

Weak Yen and Fiscal Concerns Limit Room for Intervention

The recent pressure on the yen is particularly noteworthy. The yen briefly fell overnight to its weakest level in about forty years, and the Japanese government immediately issued a warning about possible intervention. However, Jumpei Tanaka, head of investment strategy at Pictet Asset Management Japan Ltd., pointed out, "As market concerns over expansionary fiscal policy intensify, the room to suppress the yen’s depreciation through foreign exchange intervention alone may now be close to its limit."

In response, Bank of Japan officials continue to emphasize that monetary policy does not target any particular exchange rate level, but at the same time acknowledge that fluctuations in the yen merit close attention due to their impact on prices. Depreciation of the yen, by pushing up import costs, could further fuel inflation, thereby creating more direct pressure toward interest rate hikes.

Market Pricing Leads Economists, No Move Expected at Next Meeting

The gap between market and economist expectations has become quite significant. According to a survey of economists conducted by Bloomberg before the June 16 rate hike, about 70% of respondents expected the Bank of Japan to raise rates approximately once every six months. However, market participants have already positioned for a faster pace, with overnight index swaps now implying a roughly 72% probability of another hike before October.

For the near term, the market generally expects the Bank of Japan to keep policy unchanged at the Board of Governors meeting on July 31. The bank just raised its benchmark rate last month to 1%, the highest level in 31 years. Informed sources indicated that officials will closely monitor subsequent inflation risks and retain the flexibility to adjust the pace at any time.

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