Kazuo Ueda's hawkish remarks "hint at a September rate hike": Monetary conditions remain loose, and we hope to continue raising rates.

Bank of Japan Governor Kazuo Ueda addressed the media after attending the G20 finance ministers and central bank governors meeting in Asheville, North Carolina, his words clearly pointing to a September interest rate hike. He stated, "Monetary conditions remain accommodative, therefore we hope to continue raising interest rates. Monetary policy will be discussed while taking into account the upside risks to prices."

Kazuo Ueda added, "We have raised policy rates five times so far, so we need to carefully examine the cumulative effects on the economy. We hope to discuss at the next meeting whether the likelihood of the economic scenario has increased and whether the risk of inflation has increased."

This was Kazuo Ueda's last public appearance before the policy meeting on September 17-18. According to Bloomberg, overnight index swaps showed the market had nearly 100% priced in a September rate hike, and Ueda did not refute this expectation.

Meanwhile, the hawkish camp within the Federal Reserve has also released a series of strong signals. Following Warsh's warning of inflation risks, Governor Barr explicitly stated that if inflation does not sufficiently cool down, the Fed should decisively raise interest rates.

In terms of market reaction, the yield on 10-year Japanese government bonds rose to 3.004% at one point today, and the yield on 30-year bonds touched 4.197%, both reaching new highs in nearly 30 years. The Nikkei 225 index opened down more than 2.53% at 64,678.49 points, a single-day drop of more than 1,700 points. The South Korean KOSPI index also fell sharply by 2.19%.

The pace of interest rate hikes is accelerating: breaking the six-month rule.

If the Bank of Japan announces an interest rate hike on September 18, it will be the shortest interval between subsequent rate hikes during Ueda's term, breaking the previous normalization rhythm of about six months.

Kazuo Ueda also stated that the economic data was "broadly in line" with the Bank of Japan's July Outlook Report forecast, and that "there have been no major changes to the basic approach to future monetary policy operations." He further pointed out that the inflation trend is very close to the Bank of Japan's 2% target.

According to economists surveyed by Bloomberg, Japan's key price index is expected to rise to 3% by early next year.

Hajime Takata, the most hawkish member of the Bank of Japan's board of directors, further reinforced this expectation in a speech in Sapporo, Hokkaido. He cited his July call for consecutive interest rate hikes, emphasizing that the Japanese economy has entered a new phase, partly driven by surging demand for AI, and that Japan is no longer an "outlier" in monetary policy, needing to flexibly respond to various changes, including global dynamics.

US Treasury Secretary Endorses: Bessant Strongly Supports Japan's Interest Rate Hike

According to a statement from the U.S. Treasury Department, Treasury Secretary Bessenter, in a meeting with Kazuo Ueda on Sunday, emphasized the importance of sound monetary policy formulation and communication to stabilize inflation expectations and avoid excessive exchange rate volatility, and expressed strong support for Japan's "decisive market and monetary measures" to address the severe undervaluation of the yen.

Bessant also said he expects Kazuo Ueda to "do the right thing" with monetary policy, and noted that the recent yen's movements have been "well controlled."

As of Wednesday morning Tokyo time, the yen was trading at 160.37 against the dollar, having largely erased the gains made by the joint intervention in the foreign exchange market by Japan and the United States on July 31.

Fiscal expansion and monetary tightening: a tension in policy direction

Meanwhile, various Japanese government departments are requesting record-large budgets for the next fiscal year, highlighting Prime Minister Sanae Takaichi's fiscal expansionist intentions.

According to Bloomberg, the significant increase in this budget request is partly due to changes in accounting methods—Sanae Kaohsiung wants to end the long-standing practice of preparing a supplementary budget in addition to the annual budget.

Finance Minister Satsuki Katayama stated after the G20 meeting that no participant expressed concern about Japan's fiscal situation. Kazuo Ueda characterized the rise in bond yields as "following a global trend."

However, the directional divergence between continued fiscal expansion and the central bank's interest rate hike path is becoming a new variable of market attention.

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