Key facts
- The Bank of Japan plans to raise its key interest rate to 1.25% from 1% at its September 17-18 policy meeting.
- This potential increase would mark the shortest span of months between rate hikes in the current cycle that began in March 2024.
- The yen's depreciation and rising oil prices are contributing to inflationary pressures.
- US Treasury Secretary Scott Bessent publicly stated confidence that Japan would take measures conducive to yen appreciation.
- The Bank of Japan is inclined toward a conventional 25-basis-point hike, avoiding a 50-basis-point increase to prevent market disruption.
- Revised second-quarter GDP data showed the economy grew 0.4% quarter-on-quarter.
The Bank of Japan is preparing to increase its key interest rate to 1.25% from the current 1% during its policy board meeting on September 17-18, according to Nikkei and other reports. This move aims to curb inflationary pressures fueled by a depreciating yen and rising crude oil prices. If enacted, it would represent the shortest interval between rate hikes in the current tightening cycle, which began in March 2024, and would bring the rate to a level not seen in approximately 31 years.
Sources indicate the central bank favors a conventional 25-basis-point hike to avoid unnecessary market disruption and allow for assessment of the impact on economic activity. A more aggressive 50-basis-point increase is seen as potentially signaling panic and that the BOJ is behind the curve on inflation, according to Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute. Governor Kazuo Ueda has suggested that inflation risks do not yet warrant extraordinary action, emphasizing a desire to continue raising rates while financial conditions remain accommodative.
External pressure from the U.S. has also played a role, with Treasury Secretary Scott Bessent's remarks interpreted as urging yen appreciation. The acceleration in the pace of hikes reflects domestic pressures, including import price increases due to yen weakness and rising energy costs, alongside a tight labor market. Revised second-quarter GDP data showing 0.4% quarter-on-quarter growth provides further support for tighter monetary policy.