Bank of Japan may accelerate rate hikes on inflation risks, sources say

The Bank of Japan (BOJ) is closely watching for upward inflation risks that could prompt a quicker pace of interest rate hikes than currently projected by markets, according to three sources familiar with the central bank's thinking. Policymakers generally believe that the timing and speed of rate adjustments are contingent on prevailing economic and price conditions.

However, some within the BOJ perceive a possibility to increase rates more rapidly than the prevailing market expectation of twice a year. This accelerated approach could be considered if inflationary pressures, driven by a weakening yen and escalating fuel costs stemming from geopolitical conflicts, push inflation higher than anticipated. These insights were shared by sources who requested anonymity as they are not authorized to speak publicly.

Earlier, Bloomberg News reported that BOJ officials are open to raising interest rates at a faster pace than the consensus among economists, with the continued weakness of the yen contributing to upside inflation risks. This report led to an appreciation of the yen and an increase in bond yields.

A former Bank of Japan official, Tsutomu Watanabe, an economics professor at the University of Tokyo, has warned that the central bank might rapidly increase its benchmark interest rate this year, potentially exceeding 2%, as the yen continues to weaken. The current official rate stands at 1%, following recent hikes, and the 10-year benchmark government bond yield is above 2.8%, its highest in at least three decades. Despite these measures, the Japanese yen has depreciated significantly, falling 60% against the U.S. dollar since early 2021 and 3% year-to-date.

Faster tightening by the BOJ could potentially support the yen. However, the correlation between the yen and Bitcoin (BTC) has become strongly positive, with both assets falling against the dollar in tandem. Some economists argue that rapid rate hikes could exacerbate Japan's already fragile fiscal position. The situation is described as complex.