Japanese media reports that the Bank of Japan plans to raise interest rates by 25 basis points next week, potentially accelerating the pace of rate hikes to once per quarter.

The Bank of Japan is preparing to raise interest rates again at its meeting this month, with the pace of rate hikes significantly faster than before, and the signal of a policy shift becoming increasingly clear.

According to a report by Japan's Kyodo News on September 8, the Bank of Japan plans to raise its policy rate from the current level of approximately 1.0% to about 1.25% at its monetary policy meeting to be held on September 17-18. If this happens, it will be the highest level in about 31 years and the first rate hike in three months since the June meeting.

Reuters, citing sources familiar with the matter, reported on the same day that the Bank of Japan prefers to raise interest rates by the usual 25 basis points, while considering accelerating the pace of rate hikes to approximately once per quarter.

The core factors driving the rising expectations for this interest rate hike are the unexpected upward pressure on inflation from the depreciation of the yen and rising oil prices, as well as external pressure from the United States. U.S. Treasury Secretary Scott Bessent publicly stated on August 31 that he was "confident that the Japanese government and the Bank of Japan will take measures that will help the yen appreciate," which was interpreted by the market as putting pressure on the Bank of Japan's interest rate decision.

25 basis points reached consensus, 50 basis points were ruled out.

Although the market has largely reached a consensus on a September rate hike, the discussion surrounding the magnitude of the hike remains the focus.

According to Reuters, citing sources familiar with the matter, the Bank of Japan has little intention of implementing an unconventional 50-basis-point rate hike this month and prefers to maintain the conventional 25-basis-point increase .

Sources familiar with the matter said the 25 basis point decision was made to avoid market disruption and to allow time to assess the impact of higher interest rates on business and household activity.

Analysts also point out that aggressive interest rate hikes could backfire. Nobuyasu Atago, chief economist at Rakuten Securities Research Institute and a former Bank of Japan official, stated, "A 50-basis-point rate hike could be seen as a sign of panic from the Bank of Japan, instead focusing market attention on the risk of it lagging behind the curve in dealing with inflation."

Bank of Japan Governor Kazuo Ueda said last week that the economic and price situation was largely in line with expectations, suggesting that inflation risks had not yet escalated to the point where an unconventional interest rate hike was necessary. He also emphasized, "We hope to continue raising interest rates as financial conditions remain loose, but on the other hand, we have already raised rates five times, and we need to carefully assess the cumulative impact on the economy."

The pace of interest rate hikes is accelerating, but there are multiple pressures behind it.

The accelerated pace of this interest rate hike reflects the combined pressures from both domestic and international factors in Japan.

Kyodo News reported that the yen's depreciation is largely influenced by the interest rate differential between Japan and the United States, which has pushed up the prices of imported goods. Calls to correct the excessive depreciation of the yen are growing stronger, becoming an important driver for accelerating the pace of interest rate hikes.

Reuters, citing sources familiar with the matter, reported that the Middle East conflict, a tight domestic labor market, and a weak yen pushing up import costs are all driving inflation higher, prompting the Bank of Japan to consider accelerating the pace of interest rate hikes to approximately once per quarter. Nobuyasu Atago predicts that the Bank of Japan will raise interest rates to 1.25% this month and will raise them again by 25 basis points in December or January to guard against accumulating inflation risks.

Since exiting its negative interest rate policy in March 2024, the Bank of Japan has generally maintained a pace of raising interest rates every six months. If this rate hike is implemented and establishes a quarterly rate hike pattern, it will mark a substantial acceleration in the normalization process of Japan's monetary policy.

Dovish voices still exist, and internal divisions cannot be ignored.

Despite the fairly clear expectation of an interest rate hike, there are still cautious voices within the Bank of Japan.

Among the nine members of the policy committee, dovish members may hold reservations about the current pace of interest rate hikes, especially as the policy rate gradually approaches the neutral interest rate range (estimated internally by the Bank of Japan to be 1.1% to 2.5%).

Toichiro Asada, the only member to vote against raising interest rates to 1% at the June meeting, told Reuters in July that he hoped to see demand-driven inflation before supporting a rate hike. Ayano Sato, a dovish member who joined the committee on June 30, stated that the central bank needs to consider not only the upside risks to inflation but also the downside risks to economic growth.

Nomura Securities interest rate strategist Mari Iwashita said, "I wouldn't be surprised if some members believe a more cautious rate hike path is needed than the market expects. The Bank of Japan will likely stick to its 25 basis point rate hike plan for now."

Currently, the year-on-year growth rate of bank loans in Japan is still 5.4%, and overall financial conditions remain loose. This provides the Bank of Japan with some room to proceed with policy normalization step by step, rather than being forced to take radical actions.

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