The Bank of Japan minutes revealed that some policymakers believed it was necessary to accelerate the pace of interest rate hikes, and the government made a rare statement pressuring for a weaker yen.

The Bank of Japan minutes revealed that some policymakers believed it was necessary to accelerate the pace of interest rate hikes, and the government made a rare statement pressuring for a weaker yen.

The minutes of the Bank of Japan's September meeting revealed a clear division within the policy committee regarding the pace of interest rate hikes. Hawks called for pushing interest rates to the target level as soon as possible, while government representatives unusually spoke out, urging the central bank to act prudently.

According to the meeting minutes released on Thursday, several committee members clearly stated that monetary policy needs to be tightened further on top of the September rate hike . One member said that if there are signs of upward price deviation, the central bank "will need to accelerate the pace of rate hikes." Another member said that pushing the policy rate closer to the target level "relatively quickly" would help leave room for dealing with unexpected economic events.

However, at the same time, the Cabinet Office representative unusually urged the central bank at the meeting to "carefully examine the cumulative effects of past interest rate hikes" and suggested that the neutral interest rate estimate should be taken into consideration.

The government's statement cooled market expectations for a second consecutive rate hike in October, causing the yen to weaken and briefly fall below 158 yen to the dollar. A quarterly survey released on the same day also showed limited signs of rising inflation expectations, further reducing market bets on an October rate hike.

Hawkish calls: Get closer to the interest rate target as soon as possible

At its September meeting, the Bank of Japan raised its benchmark interest rate to 1.25%, a 31-year high. The minutes showed that most members believed inflationary pressures were continuing to build, necessitating further rate hikes.

Several committee members pointed out that underlying inflation has reached or is close to the central bank's 2% target level. One member stated that while hasty action is unnecessary, interest rate hikes should be implemented to prevent excessive and sustained price increases, and that underlying inflation is expected to reach 2% soon. Another member emphasized that given the significant upside risks to prices, the central bank "should continue to act in a timely manner, rather than becoming overly cautious," and suggested strengthening the analysis of neutral interest rate estimates.

The minutes also noted that the Bank of Japan faces greater pressure to raise interest rates than other central banks because its policy rate remains at the lower end of the estimated range for Japan's nominal neutral interest rate (1.1% to 2.5%).

Dovish headwinds: Weak consumer spending and government pressure

However, not all members of the nine-member policy committee believed the time was ripe for a rate hike. Committee members Toichiro Asada and Ayano Sato voted against the September rate hike. The minutes contained some comments—likely from these two members—warning weak consumption and sluggish inflation in the services sector, arguing that these factors justified maintaining the current policy.

More noteworthy is the government's stance. A Cabinet Office representative urged the central bank to carefully assess the cumulative effects of interest rate hikes at the meeting, stating that "looking ahead, the central bank may need to take its neutral interest rate estimate into consideration." According to Reuters, the Cabinet Office representative attending the September meeting was Economy Minister Minoru Kiuchi. Kiuchi is considered an ally of Prime Minister Sanae Takaichi, who is cautious about central bank interest rate hikes, partly because rising rates would increase the financing costs of his ambitious fiscal spending plans.

October rate hike expectations under pressure

The government's wording led some market participants to believe that the government was actually implying that the normalization of the central bank's policy was nearing completion. Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management, stated, "The government seems to be indicating that the normalization of the central bank's policy is almost complete, and further interest rate hikes may not be necessary."

The yen fell below the 158 level on Thursday, reflecting a significant decline in market expectations for an October rate hike. The quarterly survey released on the same day also failed to show a significant rise in inflation expectations sufficient to support an immediate rate hike, further diminishing the urgency for near-term action. Analysts had previously expected the Bank of Japan's next rate hike to occur in October or December, but the government's public statements have significantly increased uncertainty regarding this timing.

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